Sri Lanka is in its worst crisis since 1948/Photo from Wikipedia
Sri Lanka is experiencing the worst economic and political crisis since independence in 1948. Read more in the exclusive blog for the Channel 24 website.
The turbulent realities of 2022
The population is experiencing shortages of food, fuel, essential goods and medicines. According to various estimates, inflation rose by 25-30%, and the volume of external debt reached $50 billion.
The pandemic, which caused a reduction in world trade and production, is partly to blame for what is happening. Most notably in the case of Sri Lanka, the tourism sector was hit, with revenues halved.
The Ukrainian crisis has added problems. Food and energy prices remain high, leading to thirteen-hour blackouts and restrictions on fuel purchases that have already killed people in long queues. A permanent power outage could lead to lower yields on the tea-famous island's plantations. The government's decision to ban the import of chemical fertilizers last year, which was later rescinded, nevertheless had a serious impact on the country's agricultural sector, and caused a decline in the rice harvest.
The Rajapaksa clan: the path to power
The balance of power in the political arena, which developed until the beginning of 2022, looked like this: Gotabaya Rajapaksa, a former military man who was elected to the presidency in 2019 (at the same time holding the post of Minister of Defense), rules the country in tandem with his brother, Prime Minister Mahendro (Mahinda), also a former president. Mahinda is the leader of the Sri Lanka Popular Front Party (SLPP). At the same time, three more family members – Chamal Rajapaksa, Basil Rajapaksa and Namal Rajapaksa – held the posts of Minister of Irrigation, Minister of Finance, Minister of Youth and Sports, respectively. after 2005, thanks to the entrepreneurial spirit and courage of the brothers Mahinda and Gotabai Rajapaksa, who distinguished themselves in the Fourth Elam War against the Liberation Tigers of Tamil Ila. Fifteen years later, the Rajapaksa family controls a significant part of the financial flows and firmly holds power in the ruling party.
The opposition accuses it of authoritarian rule, corruption and failure to bring the country out of the economic crisis that erupted after the end of the civil war in 2009. However, representatives of the Rajapaksa clan cannot be called the only culprits of the crisis that has arisen in the country.
The tsunami of the problems of the Sri Lankan economy
For a long time, the Sri Lankan economy was considered the most developed and sustainable among the South Asian neighbors. Now its GDP per PCS per capita is $12,000, which puts Sri Lanka ahead of all countries in the region; the agricultural sector occupies 8% of GDP, industry – 26%, and the service sector – about 70%; 100% of the population received at least a full secondary education; life expectancy at birth is 77 years.
However, the course taken by the country's leadership towards the development of the tertiary sector in general and tourism in particular has led to a special vulnerability of the economy in crisis situations – whether it be a civil war, or the fight against separatism of the “Liberation Tigers of Tamil Eelam” (LTTE), or cardinal changes in traditional production chains and related services caused by the coronavirus pandemic.
In addition, a characteristic feature of the Sri Lankan economy has become a “double deficit” (twin deficit) – a phenomenon that is a coincidence in the movement of the government budget deficit and the balance of payments deficit. For a long time, external borrowing was the single largest source of funding for past debt, with serious implications for overall macroeconomic stability.
Since the leadership of the country after the end of the civil war began to focus on the development of the domestic market instead of supporting export-oriented industries, the country did not have enough foreign currency to fulfill obligations to service external debt. Successive governments over a long period were forced to take out new loans to service those previously taken in addition to annually increasing budget deficits.
As a result, the country found itself in a vicious circle of large budget deficits and unfavorable debt growth dynamics. Sri Lanka reached out to both regional and global partners as well as international organizations. While India and China are the most frequently reported support, the funds received from them represent only a fraction of the country's external debt – the majority belongs to private bondholders in international credit markets.
The main problem of Sri Lanka is the huge external debt and the chronic shortage of foreign exchange reserves. The Sri Lankan authorities were willing to lend money from China, which lent money at low interest rates, regardless of the nature of the ruling regime. Unable to pay off its debts, the Sri Lankan government leased the port of Hambantota to the Chinese in 2017 for 99 years. This concession, together with the transfer to China of a contract for the reconstruction of the port of Colombo worth $ 1.4 billion, caused concern in India, which considered the island state to be its sphere of direct influence.
However, it is not entirely fair to accuse China of creating a “debt trap”: the most burdensome for Sri Lanka was not Chinese loans, but payments on international sovereign bonds to private companies. To pay off the debt, the authorities launched a printing press, which led to an increase in the money supply by 42% in six months. As a result, the government had to raise interest rates, impose restrictions on imports and devalue the local rupee.
The increase in liabilities was accompanied by short-sighted actions by the authorities, such as the mentioned restrictions on imports of chemical fertilizers, and even before the pandemic, tax cuts . The lack of goods and foreign exchange forced the government to send funds to support imports, start negotiations with major creditors and start developing a debt restructuring program.
revolution
The chaotic protests against rising fuel and food prices turned in April into a mass movement against the government and against the Rajapaksa clan. The residences of the prime minister and some deputies were burned, the head of the Central Bank was removed from office, troops and armored vehicles were withdrawn into the street, tear gas and water cannons were used against the demonstrators. But the demands of the protesters remained unchanged: a way out of the economic crisis and the resignation of the president.
Protest moods were partially softened by mass resignations in the government. Three brothers of the current president, the prime minister, as well as the ministers of finance and irrigation, left their posts. Ranil Wikramassinghe, an authoritative person, a veteran of Sri Lankan politics, who took the premiership for the fifth time, was proclaimed the new prime minister.
Formally, he belongs to the opposition, but has close ties to Rajapaksa, so his appointment did not satisfy the opposition and its leader, Sajit Premadas, head of the second largest party in parliament, United People's Force (SJB). He stated that his party would not be part of the transitional government under President Gotabai Rajapaksa.
Additional concessions made by the family, in particular the expansion of the functions of parliament, amendments to the constitution that limited the powers of the president, only partially weakened the protest traffic. The main demand of the people – the resignation of the president – was not fulfilled.
At the same time, Rajapaksa could do little: the solution of problems depends on many external factors. It is necessary to agree on debt restructuring and get the support of major players and financial institutions. The problem is that the main creditor countries account for only 1/5 of the external debt, most of which is borrowing in the financial market.
India has already announced its readiness to provide financial assistance in the amount of $2 billion. With China, the main creditor, negotiations are more complicated. While Beijing is willing to provide a $1.5 billion currency swap, it does not want to take on additional risk, and many of the commitments are tied to specific infrastructure projects.
The protesters achieved their desired goals: the resignation of the president. On July 9, when Gotabaya Rajapaksa fled the country, there was essentially a revolution: the Sri Lankans managed to remove the authoritarian clan. The further development of the political situation in the country will depend on a complex of factors, taking into account the nature of the internal political struggle and the ability to create a government of national accord. A “window of opportunity” has opened for the opposition to express itself, the opposition parties have already agreed to form an all-party interim government. However, there is a risk that the new government will live up to its temporary name.
The intrigue remains until the end
How can Sri Lanka get out of the crisis now? To begin with, to find financial support (which, by the way, India is ready to provide), to find a source of relatively cheap energy resources. By the way, it was for this reason that Gotabaya Rajapaksa held telephone conversations with Russian President Vladimir Putin.
As for the 51 billion dollars of external debt, this problem cannot be solved in the foreseeable future. In addition, one should not assume that Rajapaksa has sunk into oblivion forever. Yes, now the family is perceived in Sri Lankan society as a personified evil and people who are personally responsible for the economic crisis. However, if the new interim government turns out to be ineffective, it is likely that the Rajapaksa will be able to turn the situation in their favor.
In addition, the Rajapaksa still retain influence in the Southern Province, primarily in the districts of Hambantota and Matara. There is their family nest, surrounded by a loyal clientele and numerous families from among the local elites, connected with Rajapaksa by ties of kinship and personal devotion.
Secondly, Rajapaksa, despite all the protests, is quite popular both in their own party SLPP as well as among the Sinhala population in general, and Sinhalese make up the majority of the population. Last but not least, this is due to the fact that Rajapaksa managed to end the many years of bloody civil war. It remains to be seen how the situation develops further.
If you see first and last names in our news with small letters, this is not a mistake, but the position of the editors regarding the actions of terrorist states and individuals who supported a full-scale invasion of Ukraine.< /em>
