Crisis deepens in Sri Lanka



May 15, 2022

Crisis deepens in Sri Lanka

Hoor Asrar describes the continuous unrest in Sri Lanka

Crisis deepens in Sri Lanka is in throes of intense conflict for the last two months and the level of upheaval keeps on increasing with apparently no end in sight. The people are protesting against their government’s handling of the economic and political crises with life becoming difficult by the day. Anger against Sri Lankan President Gotabaya Rajapaksa’s handling of a deepening economic crisis in the island nation of 22 million people spiraled into violence as hundreds of protesters clashed with police for several hours. A severe shortage of foreign currency has left Rajapaksa’s government unable to pay for essential imports, including fuel, leading to debilitating power cuts lasting up to 13 hours. Ordinary Sri Lankans are also dealing with shortages and soaring inflation after the country steeply devalued its currency last month ahead of talks with the International Monetary Fund for a loan programme.
The most important casualty of the crisis is the prized scalp of Sri Lanka’s Prime Minister Mahinda Rajapaksa who has resigned and the move came as the country was placed under curfew after violent clashes between Rajapaksa supporters and anti-government protesters in Colombo. The prime minister’s resignation also came hours after some of his supporters attacked peaceful protesters who had been camped out in front of government offices. Five people have died, including a ruling party MP, and more than 190 injured in violence in the capital. Rajapaksa, 76, sent his resignation letter to his younger brother President Gotabaya Rajapaksa, saying he hoped it would help resolve the crisis but the move is highly unlikely to satisfy government opponents while the latter remains in power. The prime minister’s resignation means his cabinet is dissolved. In recent weeks, other government ministers had already resigned and been replaced – in some cases, several times but President Gotabaya Rajapaksa remains in power and has repeatedly refused to step down.
Mahinda Rajapaksa’s resignation marks an ignominious change in fortune for a man who for years was simply Sri Lanka’s most powerful man. Rajapaksa’s decade as president saw him oversee the crushing of the Tamil Tiger rebels in 2009 but he was dogged by allegations of serious human rights abuses, as well as claims – which he strenuously denies – that he was corrupt while in power. He was denied a third term as president in 2015 but less than five years later he was back – although this time as prime minister, serving as the right-hand man of younger brother Gotabaya. The allegations of corruption have added fuel to the current protests – many people believe Mahinda Rajapaksa paved the way for his family to plunder the country’s wealth for their own financial gain. Billboards and chants demanding the family return the country’s stolen money are a common sight at the protests across Sri Lanka.
The Rajapaksa brothers have been the focus of nationwide protests for several weeks. Demonstrators blame them for mismanaging an economic crisis that’s led to months of fuel and food shortages, rolling blackouts and soaring inflation. The Rajapaksa family has dominated Sri Lankan politics in recent years. At least two other Rajapaksa brothers, and a nephew, have also held Cabinet positions. Mahinda, 76, was first elected to parliament in 1970. He previously served as president for a decade and prime minister twice. His younger brother, 72-year-old Gotabaya, was elected president in 2019. He previously served as defense secretary, and a much-feared intelligence chief accused of human rights violations during 26-year civil war of Sri Lanka.
It is widely observed that the roots of the crisis, the worst in several decades, lie in economic mismanagement by successive governments that created and sustained a twin deficit – a budget shortfall alongside a current account deficit; a devastating situation Pakistan also finds itself in. Economists point out that Sri Lanka is a classic twin deficits economy signaling that a country’s national expenditure exceeds its national income and that its production of tradable goods and services is inadequate. The current crisis was accelerated by deep tax cuts promised by Rajapaksa during a 2019 election campaign that were enacted months before the Covid-19 pandemic which wiped out parts of Sri Lanka’s economy.
With the country’s lucrative tourism industry and foreign workers’ remittances sapped by the pandemic, credit ratings agencies moved to downgrade Sri Lanka and effectively locked it out of international capital markets. In turn, Sri Lanka’s debt management programme, which depended on accessing those markets, derailed and foreign exchange reserves plummeted by almost 70 per cent in two years. The faulty policies followed by the Rajapaksa government including a decision to ban all chemical fertilisers in 2021 also hit the country’s farm sector and triggered a drop in the critical rice crop though this decision was later reversed but the damage was done.
As of February, the country was left with only $2.31 billion in its reserves but faces debt repayments of around $4 billion in 2022, including a $1 billion international sovereign bond (ISB) maturing in July. ISBs make up the largest share of Sri Lanka’s foreign debt at $12.55 billion with the Asian Development Bank, Japan and China among the other major lenders. Hit hard by the pandemic, rising oil prices and tax cuts, Sri Lanka has as little as $50 million of useable foreign reserves leaving Sri Lanka starved of foreign currency needed to pay off its debt and forcing the government to ban the imports of many goods. This in turn has led to severe shortages, runaway inflation and lengthy power blackouts with long lines for cooking gas have frequently turned into impromptu protests as frustrated consumers blocked roads. Domestic energy companies said they were running low on stocks of liquid petroleum gas mainly used for cooking. Sri Lanka needs at least 40,000 tonnes of gas each month and the monthly import bill would be $40 million at current prices. In April, the country announced it was defaulting on its $51 billion foreign debt.
For months, Rajapaksa’s administration and the Central Bank of Sri Lanka (CBSL) resisted calls by experts and opposition leaders to seek help from the IMF despite rising risks but after oil prices soared in the wake of Russia’s invasion of Ukraine the government eventually drew up a plan to approach the IMF in April and has approached the IMF for a bailout as IMF last month stated that public debt had risen to unsustainable levels and foreign exchange reserves were insufficient for near-term debt payments. IMF also mentioned that the government’s recent measures were insufficient to restore debt sustainability strongly indicating the need for restructuring.
Before heading to the IMF, Sri Lanka steeply devalued its currency, further stoking inflation and adding to the pain of the public, many of whom are enduring hardship and long queues. In the meanwhile, Rajapaksa’s government also sought help from China and India, particularly assistance on fuel from the latter. After providing the CBSL with a $1.5 billion swap and a $1.3 billion syndicated loan to the government, China is considering offering the island nation a $1.5 billion credit facility and a separate loan of up to $1 billion. The crisis however is very difficult with Sri Lankan finance minister admitting that economic instability is likely to last two more years. TW

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Hoor Asrar Rauf has remained a national swimming champion and recently
Graduated from UCF-USA in Hospitality and Event Management


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