Sri Lanka’s Economic Crisis


Paul Siebert


Sri Lanka is a South Asian Island nation of 22 million people, right off the coast of India that has a rich history, its first monarch having been recorded to have lived in the 4th century BCE. But the British colonized the island in 1815 and did not grant it independence until 1948. The country remained a dominion until 1972, when it finally became fully independent and subsequently its own republic. But since then, the people of Sri Lanka have been suffering from a civil war and corruption everywhere. When the country’s civil war ended in 2009, having lasted 25 years, a man named Mahinda Rajapaksa won the presidential election for the second time. His family would become one of the, if not the most powerful family in the country, occupying all sorts of government positions. Now, Sri Lanka is in its worst economic crisis since it gained independence. But how could it come to this and how is the Rajapaksa family related to it?


Worst economic crisis since 1948

So, Mahinda Rajapaksa started his second term in 2010 and governed the country until 2015 when the common candidate of opposition, Maithripala Sirisena, won the presidential election. But he did not run for re-election in 2019, allowing Mahinda Rajapaksa’s brother Gotabaya Rajapaksa to run for presidency. He won and promptly appointed his elder brother, the former president, whom the people of Sri Lanka had voted out of office in 2015, as prime minister. So, the Rajapaksa family always seems to come back to power in Sri Lanka and it is questionable whether that is a good thing. (not only because Sri Lanka has been accumulating vast sums of foreign debt over the years, but that is a topic for another article.)

So, at the moment, Sri Lanka is experiencing a huge economic crisis: people are taking to the streets in defiance of curfews and because crippling inflation has been sending the prices of goods skyrocketing. The people of Sri Lanka are discontent and rightly so, some might say.  After all, this is the worst economic downturn the country has experienced since it gained independence in 1948. But what exactly catapulted them into this mess?


How could this happen?

The government says Covid is to blame for the crisis and the regulations associated with it certainly did not help Sri Lanka’s vital tourism sector but experts say the crisis has been in the making for years, driven by government mismanagement and a bit of bad luck. According to Murtaza Jafferjee, the chair of Colombo-based think tank Advocata Institute, the fact that Sri Lanka has been borrowing vast sums from foreign leaders over the past years, combined with natural disasters, such as monsoons, and man-made catastrophes, such as a government-ban on fertilizers that led to a decimated harvest, has led to the crisis we now see taking hold of the country. 

But these are not the only reasons for the current crisis: Sri Lanka has been shaken by several crises over the past decade that led to this uprising as well. Among other things, the president’s dismissal of the prime minister in 2018 led to a constitutional crisis, the shooting of hundreds of people at churches and luxury hotels in 2019 led to chaos throughout the country, and the Covid-19 pandemic catapulted the country even further into chaos. The country went from crisis to crisis over the years. It went so far that Gotabaya Rajapaksa thought it necessary to lower taxes to stimulate the economy. He had been facing a massive deficit due to Sri Lanka’s national expenditure exceeding its national income but the lowered taxes did not help the country overcome the deficit; they backfired and only resulted in a decrease of government revenue, which led rating agencies to downgrade Sri Lanka to near default levels. That meant that the county lost access to overseas markets which, in turn, led to its debt management program, which depended on foreign markets, derailing. 

The Sri Lankan government was in a prickly position here. To pay off its debts, it had to fall back on its foreign exchange reserves, consequently shrinking it from $6.9 billion in 2018 to $2.2 billion this year. And the country was and still is facing $4 billion of debt repayments this year alone. In a last desperate attempt to generate money, the Sri Lankan government floated the Sri Lankan rupee; that means that its value is determined by its demand and supply on foreign exchange markets. The demand of the Sri Lanka rupee was close to zero because Sri Lanka had lost all access to overseas markets. This stunt was supposed to devalue the currency so Sri Lanka could qualify for a loan from the International Monetary Fund (IMF). The IMF is a financial institution, headquartered in Washington D.C., that works to achieve sustainable growth and prosperity for all of its 190 member countries. Countries contribute funds to a pool through a quota system and countries experiencing balance of payments problems can borrow money from this pool. So Sri Lanka wanted to qualify for this but the plunging value of the rupee only made things worse for ordinary Sri Lankans. 


What does this mean for the people?

The life of an ordinary Sri Lankan has been turned completely upside down by the crisis; they now have to wait in endless lines for basic goods, which are often rationed and they have had to see shops close everywhere because they can’t run fridges, air conditioners, or fans. Soldiers are now stationed at gas stations to calm customers who have to wait in the searing heat for hours; there have even been reports of people dying while waiting there. And the frequent power cuts often plunge Colombo, one of Sri Lanka’s capitals, and other cities into darkness for more than 10 hours at a time. 


Timeline of protests

The crisis really unfolded on March 31, 2022, when protesters tried to storm the home of president Gotabaya Rajapaksa, demanding his resignation. The protesters had been rallied on social media before this, likely without knowing how unpleasant the experience would be. The police turned up and employed tear gas and water cannons against the protesters who did not leave unhurt. Following this, the capital was placed under curfew. In the next few days, Rajapaksa declared a state of emergency, giving security forces powers to arrest and detain suspects, declared a 36-hour nationwide curfew, and deployed troops.

Only 3 days after the initial protests, almost the entire cabinet resigned, leaving Rajapaksa and his brother, the prime minister, behind. Rajapaska tried to find compromises with the opposition by offering them to form a government, which would have him and his brother as leaders, but he was denied. It did not get any better for Rajapaksa on April 5, when he lost his parliamentary majority because his partner parties pulled out and continued as independent units and his new finance minister resigned just a day after he was appointed.

At this point, the rupee had plunged by about 35% in a month and the country’s central bank tried to halt the freefall by hiking interest rates by a record 700 basis points.

The government also announced it would suspend payments on its $51 billion foreign debt as a last resort after it had run out of foreign exchange to import desperately needed goods, such as life-saving-medicines, which Sri Lankan doctors said they were all out of, warning that the crisis could take more people’s lives than the Covid-19 pandemic. 

Gotabaya Rajapaksa replaced his brother by appointing Ranil Wickremesinghe, a veteran politician who has been in and out of office for two decades, as the new prime minister on May 12. He is supposed to bring stability back to the country after days of violence. The president’s brother had only resigned reluctantly after the Rajapaksa’s family’s supporters had violently attacked peaceful anti-government protests. (They attacked a protest camp in Colombo; the attack led to days of violence and the death of at least 9 people; following this, the army was deployed and the police was given orders to shoot any looters on sight) After Rajapaksa’s brother stepped down, the main opposition party was offered to lead a new government but its leader demanded the president step down first 

Wickremesinghe, who is 73 years old, has been a stalwart of Sri Lankan politics for more than four decades and last served as prime minister between 2015-2019 after an election that unseated the Rajapaksa clan from power after more than a decade. He is known as a pro-west free-market reformist and was among the people who called for Mahinda Rajapaksa (the PM) to step down after the violent attacks by his family’s supporters. He might also be able to make bailout negotiations with the International Monetary Fund smoother than his predecessor, which would be good news for the people of Sri Lanka. In his speech that he held after it was announced that he would be the new Prime Minister, Wickremesinghe said: “We want to return the nation to a position where our people will once again have three meals a day. Our youth must have a future.” and announced that he plans on working with both the opposition and governing party. But not everyone is happy because Wickremesinghe is seen as being close to the Rajapaksa family, even though he called for the PM’s resignation.

For example: Opposition politician Anura Dissananayake said the choice of Wickremesinghe was more about protecting the president and his family from public anger over his role in the economic crisis than actually solving the country’s problems. Members of Sri Lanka’s influential Buddhist clergy, in this case the leading monk Omale Sobitha, have also expressed their dissatisfaction: “What we asked for is a new government that will include fresh blood, not those who have already been rejected by the people.”

It is still unclear whether Wickremesinghe’s appointment will be enough to placate the protesters who have been repeatedly calling on the president to quit but the Rajapaksas certainly hope so, even after Wickremesinghe has lost much of his support over the past years. His party actually only holds one seat in parliament at the moment, leaving him as its sole representative. And that is partly because people believe he shielded the Rajapaksas when they fell from power in 2015. So it is understandable why people think that his appointment is only another way to keep protesters from calling for Gotabaya Rajapaksa’s resignation.


The government’s reaction

Rajapaksa and his government did not really show themselves much during the first few days or weeks of the protests but Gotabaya Rajapaksa released a statement urging all parties to work together for the sake of all citizens on April 4, 2022. The statement further read: “The current crisis is a result of several economic factors and global developments. As one of the leading democratic countries in Asia, solutions should be found to this within a democratic framework.” Previously, Rajapaksa had said in an address to the nation that “this crisis was not created by me.” 

On April 6, Chief government Whip Johnston Fernando, a close ally of the president, also said the president would not, under any circumstances, resign. He does not seem to feel responsible for the crisis at all and so far it also doesn’t seem like he will step down by himself. 

In reaction to the protests, Rajapaksa employed the military, signed several orders that allowed the police to shoot looters on sight, and appointed a new PM. But this was not enough for the people of Sri Lanka who say the only good thing he could do would be to resign immediately: Kavindya Atul Loke, a protester in Colombo, told the BBC: “The reforms he’s suggesting are not what we need. What we need right now is for [the president] to resign from office… It baffles my mind that Gotabaya Rajapaksa doesn’t understand that.”


What’s next?

Sri Lanka’s government will try to close a deal with the IMF as soon as possible now that Rajapaksa has agreed to working with them but until then, a diesel shipment under a $500 million credit line signed with India in February is supposed to arrive soon and Sri Lanka and India have signed another $1 billion credit line for importing essentials, such as food and medicine. China is apparently also considering offering Sri Lanka a $1.5 billion credit line and an additional $1 billion loan. 

So, it seems like Sri Lanka is getting financial aid from economic powerhouses in the region but they will have to pay all of this money back at some point so you do wonder whether it is smart to increase their debt even further, knowing that the country won’t be able to repay anything anytime soon. But the people of Sri Lanka need help quickly so there is no time to wait for wonders to occur. This might very well be the only possibility the government has. It is difficult to say when Sri Lanka will be able to pay off its debt and grow its economy back to pre-Covid levels and people are also asking themselves whether it is even possible at all with the Rajapaksa family in all sorts of ranks in the government but the people of Sri Lanka seem to be ready to fight for what they want. For now, we should all hope that this crisis can be resolved as quickly and peacefully as possible so Sri Lankans can lead a normal life once more.