Understanding the Sri Lankan Economic Crisis
This is an article about the ongoing economic crisis in Sri Lanka. Due to the unpredictable nature of the present situation, the data is bound to change. In order to maintain consistency, the latest data available on 27th April, 2022 has been used.
Let’s recap this month’s headlines from Sri Lanka:
Bankrupt Sri Lanka asks citizens abroad to send home cash – Times of India
Fitch Places 13 Sri Lankan Banks on Rating Watch Negative
Sri Lanka defaults on entire external debt of $51bn – Times of India
There is trouble in the island paradise.
No food, no fuel, no medicines, critical surgeries being cancelled, daily power blackouts and wide scale protests on the streets—that is what Sri Lanka looks like right now.
How did this happen?
There are four main angles that we need to look through to answer this question:
Policy, Politics, Fate and of course, China.
Policy:
The current crisis did not erupt out of nowhere. It is a result of years of mismanagement. There’s a fundamental problem with Sri Lanka— it imports more than it exports, leading to a trade as well as budget deficit. Now the right way to go about dealing with this would be to narrow down the deficit. But Sri Lanka took the high road (or maybe even the wrong road). It expanded its debt and kept on borrowing heavily from any lenders it could find.
Politics:
The Asian Development Bank did flag this problem back in 2019. This was also the year Gotabaya Rajapaksa was campaigning for presidential elections. Among his election promises were deep tax cuts. When he was elected president, he kept his promise and a series of tax cuts followed. Rating agencies raised an alarm as they realised that soon the state coffers of Sri Lanka would dry out. So Sri Lanka was downgraded to near default levels. As a result, investors fled the country and Sri Lanka began to lose access to international markets.
The story does not end here. In April 2021, the Gotabaya government banned the import of chemical fertilisers , stating the ‘harmful for health’ reasons (read excuses). Critics soon realised the reason behind banning imports was an acute shortage of foreign exchange. Because of the fertiliser ban, farm produce fell drastically and Sri Lanka had to import rice, something that had never happened before.
Fate:
Here, fate most certainly just means things that were out of Sri Lanka’s control. Like the Coronavirus. With the imposition of worldwide lockdowns, the condition of the already suffering tourism industry of Sri Lanka went further downhill. Imagine that happening to a country which depends on tourism for 13% of its GDP and for foreign currency.
The pandemic also hit remittances. Lankans abroad stopped sending money back home.
So basically, the tax revenue dipped, the revenue from tourism fell, the agricultural sector was suffering and, of course, there was a raging health crisis because of the virus.
China:
So when foreign agencies turned their backs on Sri Lanka, it turned to its neighbours. Bangladesh loaned $200 million, India $500 million. And yet, Sri Lanka could not sustain. As Rajapaksa chose to move closer to China, they used bilateral debt to fund infrastructure and expand the military, another addition to Lanka’s liabilities. Colombo was never wise with money but it was China that made sure it went bankrupt.
The Gotabaya government also devalued the Lankan Rupee in order to encourage remittances and qualify for a loan from the IMF. The obvious result was a deep plunge in people’s purchasing power and a massive rise in inflation. The currency has fallen 32% from the beginning of this year, causing inflation to go up by nearly just as much.
The ongoing protests:
“Yeh public hai, yeh sab jaanti hai (Translation from Hindi: There is nothing hidden from the public, it is not blind)” fits perfectly in this situation. When something is wrong with the country, the first to realise that is its people. Sri Lankans across ethnic lines have put aside their differences and taken to the streets to sloganeer“GO GOTA GO”.
Even the Sinhalese who have been a loyal vote bank for the Rajapaksas for several decades have turned against them. For a political family that has enjoyed unequivocal support for years of ethnic strife involving the Northern Tamil, the crisis faced by the Rajapaksas is truly a total reversal of fortunes.
Following a protest outside the president’s residence on March 31, the government declared a state of emergency on April 1, imposed a 36-hour curfew beginning at 6 p.m. on April 2, and shut down social media networks for 15 hours the following day.
Excessive and unjustified police violence against protesters has also been reported.
An 86-year-old woman walks through the protesting crowds, content to be alive and witnessing what appears to be a genuine Sri Lankan expression— a genuine coming together of the Sri Lankan people against the blunders of the government. A 19-year-old vivacious youngster wields a 12-socket spike buster to charge smartphones. An elderly man distributes black tea in paper cups. The camaraderie is palpable.
The Tamil question:
While Sinhalese protesters claim that the crisis has erased ethnic divisions that have plagued Sri Lanka since the early 1980s, some Tamils have been outspoken in their opposition. The Tamil intelligentsia in Sri Lanka has pointed out that the Tamil struggle for equality in the island nation predates the Galle Sea Face protests by years and that it would be inappropriate to compare or gloss over the ethnic minority’s pain.
The Tamils have suffered just as much as the Sinhalese and other communities in Sri Lanka as a result of the crisis, but their voices have largely gone unheard. Since the beginning of the crisis, there has been a steady influx of economic refugees into Tamil Nadu, but protest sentiment among Tamils has not been as unified as that of the protesting Sinhalese in Colombo’s Galle Face.
As the island nation sleeps and awakens another day, another layer of its multicultural history is internalised and stored for the future.
–Wani Deoras
FYBSc (2021-24)