Sri Lanka is calm again, but that doesn't mean things are getting better
On the surface, calm has returned to Sri Lanka since the South Asian nation plunged into political chaos and virtual bankruptcy last summer. Gone are the fuel lines that snaked for blocks; a seaside expanse that had been the site of a monthslong protest encampment was resplendent over the holidays with Christmas lights and carnival rides.
But underneath, the island nation's economy remains on a ventilator, with the government yet to secure a way out of crushing debt. Sri Lankans have become resigned to a sad reality: pared-down meals, shrunken incomes and reduced expectations.
Many young people are desperately trying to find a way out of the country. Those who cannot escape are left to reckon with the likelihood that any economic rebound will be modest at best, all but erasing the earlier promise of mobility in this once middle-income nation.
Perhaps most of all, what has taken the wind out of Sri Lankans is that, even after a popular uprising that ousted the strongman president in July, the same political elite still call the shots, with little accountability for the mismanagement and excess that wrecked the country.
Economic data paints a picture of starkly diminished lives. Inflation, which peaked about 90% during the worst of the crisis, remains a punishingly high 59%. For 2 in 5 households, food purchases eat up at least 75% of expenditures. Nearly 30% of the population is experiencing food insecurity, according to the United Nations.
Some semblance of stability has come not through repairing the economy but through a series of painful tax hikes and subsidy cuts that have further constrained demand. While necessary, the moves are unpopular and offer grist to the political opposition, which raises the risk that this government or the next could pull back on them.
In Sri Lanka's lush central plains, H.M. Dissanayake, 65, a farmer, and his wife, Malani Mangalika, 64, who runs a corner store, have reduced their consumption of fish and meat from three times a week to once a month.
The couple looked at each other as they tried to remember the last time they had milk.
“Six months ago,” Mangalika said.
Whether Sri Lanka, a country of 22 million, manages to turn things around or instead plunges deeper into economic distress is being closely watched for what officials and diplomats described as a potential domino effect. Dozens of other smaller nations are similarly struggling with unsustainable debt, a hole that has become even harder to climb out of with the economic blow of the pandemic and rising prices related to Russia's war on Ukraine.
Many of these countries have something in common: They owe a large share of their debt to China.
Sri Lanka defaulted on its debt last spring and it is now in discussions with the International Monetary Fund over a bailout package that could inject $2.9 billion in muchneeded cash into its economy and, more important, restore some confidence with creditors.
As part of the conditions for finalizing the IMF package, Sri Lanka is required to get assurances from its bilateral creditors like China on restructuring the terms of its outstanding debt. A majority of Sri Lanka's roughly $50 billion in debt comes from multilateral lenders and sovereign bonds. China is the largest bilateral donor, with about $7 billion in outstanding debt, according to the Sri Lankan government.
Sri Lanka had hoped to complete the IMF deal by December, but the date has been repeatedly pushed back as the Chinese response has been slowed by last fall's Communist Party congress and the COVID-19 outbreak that has since swept the country, officials said.
India, another main donor, has given its assurance on debt restructuring. Last week, China sent an initial response to the IMF that Sri Lankan officials said was promising, but it remained unclear whether the offer would satisfy the monetary fund.
Beijing has been moving deliberately, analysts said, in part because it is contending with a mountain of nonperforming loans to other nations, and any concessions it makes to Sri Lanka could set a precedent.
Brad Parks, the executive director of the AidData lab at the College of William and Mary, which has been studying Chinese lending patterns, said that Beijing's playbook has been to emphasize that any talks on loans will remain bilateral and discrete. And while China has been generous in offering repayment extensions or other assistance, it has drawn a line at reducing interest rates or writing off loans.
“They've got all these big fires popping up all over the world and being able to deal with them in kind of a timely way and effective way really does require a coordinated rescheduling approach,” Parks said. “And so it's very awkward for China, because they had actually inserted clauses, boilerplate clauses, into their loan contracts that expressly prohibit the borrower from participating in coordinated rescheduling.”