Roots of the Sri Lankan crisis

The crisis in Sri Lanka today is unprecedented in its 75-year history. The problem is both economic and political, and hence, exceptionally complicated.

The president, the prime minister, the political parties in parliament and the general public are making contradictory assertions and putting forth conflicting demands, making the problem appear intractable.

The masses are extremely agitated over the severe shortage of essential commodities in the market. This is because of an unprecedented shortage of foreign exchange. Remember, Sri Lanka is heavily dependent on imports even to meet the daily needs of the people.

Then, there is political turmoil with the opposition and the general public clamoring for the resignation of President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa. But the Rajapaksas are refusing to go, saying that they have a mandate to rule for five years. To add to the confusion, the president is asking the prime minister to resign and the prime minister is refusing to oblige.

Then there is the tug-of-war in parliament with various political parties and factions advancing their partisan agendas without making any effort to come together on a common platform to oppose the government and give the country a single and precise alternative direction.

The government is now abjectly dependent on financial help from India, the IMF, World Bank and other international institutions. But the political confusion could make it difficult for the government to accept the IMF’s conditions, which are expected to be stringent.

Sri Lanka’s forex problem could be traced to the way President Gotabaya Rajapaksa handled the economy when he took over in 2019 and the way he handled the subsequent COVID-19 pandemic. On being elected, he announced huge tax concessions, including taking off 72 entities from the VAT net, even though income from taxes has been very poor in Sri Lanka.

He recruited 100,000 graduates to unproductive government jobs, further burdening the weak exchequer. When the pandemic struck, he ordered severe lockdowns, bringing trade, industry and transport to a grinding halt. He then ordered a 100% switch-over to organic farming which crippled agriculture. Tourism, a major foreign exchange earner, suffered a direct hit because of the severe pandemic restrictions and quarantine requirements. While exports dwindled, leading to a fall in dollar earnings, imports also declined leading to a fall in customs duty collections.

Meanwhile, time had come for the repayment of foreign debts which had mounted since 2014, when the government started borrowing from the foreign commercial market by floating International Sovereign Bonds (ISB). Not being designated as a poor country, Sri Lanka was not eligible for concessional lending anymore. Government could have gone to the World Bank, the Asian Development Bank or the Japanese JAICA for cheaper loans (at 1% or less interest with a repayment period of 25 to 40 years). But it chose to float ISBs which secured quick money though at high interest rates (at 6% interest with a payback time of 5 to 10 years).

The government preferred to take expensive loans without conditions on how it should be used, to cheaper money under stringent conditions. The World Bank and the ABD would want to know how their money will be used. But the ISBs have no such conditions. In Sri Lanka, very often, ISB proceeds are used for politically-oriented but loss-making projects. By 2019, 56% of the foreign loans were commercial borrowings. And by 2021, the total foreign debt was US$ 51 billion, most of it from commercial borrowings especially through ISBs. Though China is blamed for the Sri Lankan “debt trap”, Chinese loans account for only 10.5% of Lanka’s foreign debt.

The debt caused by ISBs created a huge re-payment problem. During 2022, Sri Lanka is required to pay back US$ 6.9 billion. Unable to repay, and with just over US$ 1 billion in the reserve, the government rushed to the IMF for help, with India’s assistance. It is expecting relief to the tune of US$ 4 billion. The government also declared a temporary moratorium on debt repayment.

India is delivering loans and material help worth US$ 2.5 billion and the World Bank has given US$ 600 million. China has offered US$ I billion as a “loan to repay its loans”, and US$ 1.5 billion as buyer’s credit. But China has indicated that disbursement will depend on what the IMF has to say about Chinese loans. If the IMF wants Sri Lanka to stop Chinese loans, and Sri Lanka agrees, Sino-Lankan relations will suffer, Ambassador Qi Zhenhong warned.

The common folk have been continuously demonstrating in front of the President’s office, parliament has been wanting a change in government. But the 225 MPs are divided on what kind of change they want and how to bring it about. Some parties want to impeach the President, while others want to pass a No Confidence Motion against the government headed by Prime Minister Mahinda Rajapaksa. Some want to join the All-Party government which the President has proposed, while others do not want to join any government so long as Gotabaya Rajapaksa is President. Some want to know what the interim government proposes to do to solve the economic problem, while the Tamil parties want to know what the new dispensation will do to solve the Tamil question. Some want the Rajapaksa clan to be kept out of an All-Party government. Some want fresh elections, while others argue that conditions are not suitable to hold elections.

The president wants to sack the prime minister, even though he is his elder brother. The president has accused the prime minister and his siblings of corruption which he said had led to the economic crisis and foreign exchange shortage. But the prime minister has shot back saying that it was the president’s dictatorial style which had landed the country in a mess. The prime minister has threatened to sit in the opposition if sacked, claiming that the majority of the ruling party MPs are with him.

* PK Balachandran is a senior Indian journalist based in Colombo, Sri Lanka, writing on South Asian affairs