On 19 March 2022, authorities in the Western Province, the most densely populated of the nine provinces of the Democratic Socialist Republic of Sri Lanka, put on hold, indefinitely, all school examinations, on the very reasonable grounds that they had run out of both paper and ink. This marked yet another low point in the steadily declining fortunes of the South Asian island-state of 22 million people, where a state of emergency was declared on 1 April, in response to spreading and increasingly violent protests by citizens demanding the resignation of President Gotabaya Rajapaksa. The defiant president also invoked the Public Security Ordinance, and imposed a nationwide 36-hour curfew, from 6 PM on Saturday 2 April to 6 AM on Monday 4 April. This wasn’t the first emergency proclamation in recent times, as President Rajapaksa had earlier declared an economic emergency in September 2021.
The island of Sri Lanka, best known to many Westerners as a tropical paradise and a once- favoured holiday destination, gained its independence from the UK on 2 February 1948, only to face many of the challenges of decolonization, first as a Dominion within the British Commonwealth until 1972, and thereafter as a republic, when it changed its name from Ceylon to Sri Lanka. A gradually widening divide between the majority Sinhala Buddhists and the minority Tamil Hindus, cultivated by the government’s Sinhala-only policy, culminated in a protracted and bloody 26-year-old Tamil Eelam civil war, which only ended in May 2009 with the government of Mahinda Rajapaksa declaring victory over the Tamil Tigers. This triumph, achieved at great human cost, made Rajapaksa a hero in the eyes of the Sinhala and he went on to consolidated his power, aided by his brothers. As of early 2022, Gotabaya is both President and defence minister, supported by former President Mahinda (prime minister), Basil (finance minister), and Chamal (irrigation minister). Heading the line of dynastic succession is Mahinda’s eldest son, Namal, currently minister for sports and youth. Sri Lanka is accustomed to political dynasties, and the Rajapaksa dynasty follows in the footsteps of the Bandaranaike dynasty, which comprised the husband-and-wife team of Prime Ministers Solomon W.R.D. Bandaranaike and Sirimavo Bandaranaike, whose daughter, Chandrika Bandaranaike Kumaratunga, served as President from 1994 to 2005.
Sri Lanka’s present economic woes have resulted from chronic economic mismanagement and rampant political corruption, the effects of which have been compounded by the disruption of the all-important tourism industry by the Islamist terrorist bombings of Easter Sunday 2019, with 260 deaths in Colombo, and the COVID-19 pandemic that followed less than a year after.
Sri Lanka has accumulated an unsustainable foreign debt ($7.3 billion), amounting to 119 per cent of GDP, depleted its foreign currency reserves ($2.31 billion in February 2022), and ended up with a huge trade deficit. The debt has been increasingly serviced by issuing International Sovereign Bonds (ISB), which carry higher interest rates and shorter maturity periods, and by delving into shrinking foreign currency reserves. Debt repayments in 2022 thus include $1 billion in maturing ISBs in July.
During their time in power, the Rajapaksas have cultivated closer ties with China. As part of this relationship, China has facilitated major infrastructure projects in Sri Lanka, such as the Hambantota International Port (opened in 2010) and the Colombo Port City project (launched in 2014 in the aftermath of the 2013 Belt and Road Initiative), both of which are under-utilised and can be best described as “white elephants”. Sri Lanka appears to be caught up in a Chinese “debt trap”, owing massive debts to its benefactor China, which has yet to agree to a restructuring of its debt.
Sri Lanka’s tax revenues have been slashed by imprudent, neoliberal, tax concessions and cuts in 2019, while its failure to implement a progressive tax regime means that 80 per cent of revenue is raised through indirect taxes, which are regressive and impact lower wage- earners more than those with high incomes. The Central Bank, meanwhile, has responded to the reduced access to international capital markets and declining tax revenues by printing more money, further stoking inflation and depreciation of the Sri Lankan rupee, which was devalued in March 2014.
Reliance on imports, a failure to develop the manufacturing sector and thereby diversify exports, and a heavy dependence on foreign assistance have all played a part in the present economic turmoil. Sri Lanka’s exports are dominated by agricultural products (tea, spices, rubber), textiles and garments, and gemstones, while other essential commodities have to be imported and paid for in foreign currency, which is in turn generated mostly by tourism and the remittances of expatriate workers. Export prices have dropped, and import controls, restricting imports to those of critical importance, have been introduced in a desperate attempt to conserve foreign exchange holdings.
All of the above means that Sri Lanka has become a twin deficit economy, in which a budget (fiscal) deficit coexists with a current account (balance of payments) deficit. In effect, government outgoings (expenditure and interest payments) exceed monetary inflows (tax revenues and issuing of bonds), just as imports exceed exports.
Ordinary citizens have been directly affected by shortages of essential commodities, such as milk powder, human food/animal feed, cooking gas, kerosene, diesel, petrol, and medicines. Food and fuel costs continue to rise as inflation increased month-by-month, reaching 18.7 per cent in March. Power shortage have led to 12- to 16-hour-long scheduled power cuts and blackouts. Long queues have formed at petrol stations, with reports of deaths from heat stroke caused by prolonged waits under the Sun. A shortage of newsprint has forced newspapers to stop publishing print versions altogether or just cut down their size, while concentrating on online communication. There have been reports of economic refugees, mainly Tamils from Northern and Eastern Tamil Nadu, have been arriving at the Rameswaram coast of the southern Indian state of Tamil Nadu.
Sri Lanka’s present economic misfortunes will require stronger measures than have hitherto been prescribed by its leaders, possibly involving a relief package from the International Monetary Fund, a restructuring of its foreign debt with rollover of existing loans, and requesting bondholders to take a “haircut” on repayments. As a good neighbour, India has stepped in to support Sri Lanka, providing a $1 billion credit line to allow the purchase of essential commodities, on top of a $400 million currency swap and a $500 million credit line for the purchase of fuel. Apart from China and India, Sri Lanka has also appealed to other countries for financial help, among which are Oman, Qatar, and Japan. The current crisis may well strengthen Sri Lanka’s relationship with its closest neighbour, as it re-evaluates its relationship with China, and also prompt a rethink about its economic priorities in the longer term. Whatever the chosen remedies, painful times lie ahead for the nation’s citizens until any therapeutic effects start to kick in.
Ashis Banerjee