Sri Lanka in throes of economic, political crises

Located in the Indian Ocean southwest of the Bay of Bengal, the pear-shaped South Asian Island nation Sri Lanka is in the throes of its worst-ever economic and political crisis.

Nine people were killed and more than 300 injured in mob violence earlier this week, and property belonging to the ruling Rajapaksa family and their political allies was vandalized.

Sri Lankan troops had to conduct a pre-dawn operation to rescue Mahinda Rajapaksa, who had resigned from the office of prime minister on May 9. His younger brother President Gotabaya Rajapaksa is still clinging to his chair. While Mahinda was taken to a naval base, a court has banned him, his politician son Namal and 15 allies from leaving the country.

Experts believe that a combination of various factors that included a meltdown in tourist traffic due to COVID-19 related restrictions, rising energy prices coupled with populist measures that evaporated the foreign exchange reserves led to soared inflation and the current crisis.

The shortage of medicine, fuel, and other essential items became precarious in March to the extent that the government had to cancel school exams for millions of students after running out of printing paper.

Colombo needs to serve a debt of around $6.9 billion this year. But its foreign currency reserves currently stand at about $2.3 billion.

Interestingly, the new Prime Minister Ranil Wickremesinghe, 73, who assumed office the sixth time, has never finished a full term.

According to Nikkei Asia, a Japan-based financial news outlet, religious leaders like Buddhist priest Omalpe Sobitha Thero and the head of Sri Lanka’s Catholic Church, Cardinal Malcolm Ranjith, have opposed his appointment and called for concrete solutions to address economic woes and public protests.

Krishan Chander Singh, a former secretary in India’s External Affairs Ministry, said it was still unclear whether the band-aid solution of changing the face of the prime minister will placate the irate Sri Lankan public who wanted to see the end of the Rajapaksa dynasty who have been blamed for economic mismanagement.

Printing money to pay employees

The new prime minister said he was forced to permit printing money to pay state-sector employees and for essential goods and services. He also proposed selling off Sri Lankan Airlines as part of an effort to stabilize the nation’s finances. The carrier lost 45 billion Sri Lankan rupees ($128 million) in the financial year ending March 2021.

Gulbin Sultana, a fellow at the New Delhi-based Institute for Defence Studies and Analyses (IDSA) and an expert on Sri Lankan affairs, believes that alarm bells had started ringing in August 2020, when a decline in foreign reserves was reported.

“But in November 2021, they dipped to a precarious level. It was just enough for meeting one month’s import. A month later, there was a slight increase, but even then, it was not enough for two months’ import. Reportedly, the gross foreign reserves dropped 24% further in January 2022 to $ 2.3 billion,” she said.

Even as the Sri Lankan authorities had acknowledged that they are facing increasing difficulty in settling the import bills due to the dollar crunches, particularly for the import of fuel for daily requirements, the Central Bank of Sri Lanka (CBSL) had, however, exuded confidence that the country will not default in debt servicing. Experts say the CBSL had not taken into account the ground situation as well as the global geopolitical-economic developments, including the fallout of the Russia–Ukraine war.

The foreign exchange inflow to the country had declined first due to the impact of the Easter Sunday attack on the tourism sector in 2019 and then due to the outbreak of a global pandemic.

The foreign reserves crisis created severe fuel shortages leading to daily power cuts and shortages of food, medicines, cement, and other essential items. Long queues in front of grocery stores, pharmacies, and fuel depots in many parts of the island nation led to public unrest. Many of the containers got stuck at the Colombo port for several days as importers failed to get a Letter of Credit (LOC) from the banks.

The government had restricted the import of chemical fertilizers and agrochemicals (insecticides and herbicides) in May 2021. Even though the government justified the ban to promote organic farming in the country and prevent the outflow of foreign currency, it led to a sudden reduction in farm produce. Agriculture experts say the move needed years of preparation.

 

Cut in fertilizer imports

Before the ban, Sri Lanka used to spend around US$ 400 million annually on fertilizer imports. This policy was severely criticized as it affected agricultural production and escalated food insecurity in the country.

Although the Sri Lankan government is hopeful that the foreign exchange situation will improve soon with the materialization of envisaged inflows from the bilateral partners, as well as non-debt creating foreign currency inflows in the coming days, experts believe that the current economic situation is going to prevail at least for another two or three years. They maintain that with uncertainty about the improvement of the tourism and export sector and with no end to the war between Russia and Ukraine, it is unlikely that the debt service deadlines to the tune of $ 29 billion by 2026 can be met.

Of the total tourists who visited Sri Lanka till February, Russians accounted for 15.8% and Ukrainians accounted for 8.7%. The lack of tourists from these countries due to the war will have implications for the tourism sector.

Also, the Russia–Ukraine war has already caused global oil prices to rise. Sri Lanka was also dependent on a large number of Chinese tourists. About 167,863 Chinese tourists visited Sri Lanka in 2019, according to a report published by the Sri Lanka Tourism Development Authority.

Further, the EU’s June 2021 resolution criticizing the human rights record of Colombo also queried the pitch. The EU is the second-largest market for Sri Lanka’s export sector. UN High Commissioner for Human Rights Michele Bachelet also took a critical stand in her report presented during the 49th Session of the UN Human Rights Council (UNHCR) in March for not implementing its pledge to establish war crimes accountability mechanisms.

Human rights groups believe that crimes which are originated from ethnic tensions between the minority Tamil and majority Sinhalese communities and the civil war fought between the Sri Lankan government and the Liberation Tigers of Tamil Eelam (LTTE) are yet to be addressed. About 70% of the 22 million people in this island nation off India’s southern coast are Buddhists, mainly ethnic Sinhalese. Hindus, mainly ethnic Tamils, make up 12.6% of the population, while another 9.7% are Muslim and 7.6% are Christian.

Heroes turned villains

Just a year ago, Mahinda was celebrated by the Sinhala-Buddhist majority for crushing separatist Tamil rebels and ending Sri Lanka’s decades-long civil war in 2009 through a brutal military offensive. His brother Gotabaya was Mahinda’s principal advisor who controlled the armed forces and police during the civil war.

Such was the grip of this family on the politics that family member Basil Rajapaksa was finance minister, and another brother Chamal Rajapaksa, parliament’s speaker. Mahinda’s son, Namal, a lawyer, was a minister for sports and youth. They had to resign in the wake of public protests. Mahinda’s other son, Yositha, however, continues as chief of staff to the prime minister.

In a televised address, Prime Minister Wickremesinghe has predicted more difficult months ahead. He has pleaded with people to prepare for some sacrifices without spelling them. “I have no desire to hide the truth and to lie to the public. Although these facts are unpleasant and terrifying, this is the true situation,” he said.

But the experts believe that getting out of Sri Lanka’s economic mess requires significant and painful reforms, which only an elected government with a popular mandate can deliver.

The government will also need a majority in the parliament to adopt the new budget. Many voices, therefore, are calling for fresh elections and the installation of a popular government to bring the political legitimacy and stability to initiate policy reforms, not just replacing the prime minister.

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