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How Sri Lanka Landed in a Political and Economic Crisis and What It Means

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Sri Lanka’s street protests over soaring inflation, shortages of food and fuel and lengthy power cuts have shaken President Gotabaya Rajapaksa’s hold on power. His prime minister, who is also his brother, resigned along with other government ministers, and the nation defaulted on its debt. While the opposition called for fresh elections in the South Asian nation, a new prime minister, Ranil Wickremesinghe, was sworn in within days. The political turmoil -- and sporadic outbreaks of violence -- were complicating efforts to manage the island’s foreign exchange crisis and secure more funds to keep its tourism-reliant economy running, having already been hit hard by the Covid-19 pandemic.

1. How did the crisis start?

Rajapaksa carried out populist tax cuts in late 2019, reducing revenues just months before the pandemic devastated the economy, with international flights grounded and successive lockdowns ordered. Remittances from overseas Sri Lankan workers dried up as well as many lost their jobs. With foreign-exchange earnings plunging, Sri Lanka struggled to manage its external debt, which had grown in part due to loans from China to fund ambitious infrastructure projects. Even though Sri Lanka has received credit lines from neighbors like India, it was unable to regularly pay for imports of fuel and essential foods. Making matters worse was Rajapaksa’s pivot in 2021 to organic farming with a ban on chemical fertilizers that triggered farmer protests and saw production of critical tea and rice crops decline. 

2. What pushed it into default? 

Policy makers flagged to creditors that Sri Lanka wouldn’t be able to make payments until its debt was restructured, and it was therefore in pre-emptive default, central bank Governor Nandalal Weerasinghe said at a briefing May 19. Coupon payments, originally due April 18 and worth $78 million combined on notes maturing 2023 and 2028, had a 30-day grace period that expired on May 18. The move marked the nation’s first sovereign debt default since it gained independence from Britain in 1948. 

3. What’s happening to the economy? 

The $81 billion economy is close to bankruptcy, with Russia’s invasion of Ukraine raising global prices for oil and other commodities. Sri Lanka’s growth is slow and inflation is at multiyear highs -- consumer prices surged almost 30% in April from a year earlier, after a jump of almost 19% in March. The authorities have raised interest rates, devalued the local currency and placed curbs on non-essential imports. But with a meager $2 billion in foreign exchange reserves and $7 billion in debt payments due this year, restoring the country’s economic health remains an uphill battle. Mahinda Rajapaksa’s resignation as prime minister on May 9 threatened to leave no government in place to lead talks with the International Monetary Fund for emergency funds to buy food and fuel. That danger was averted with the appointment of Wickremesinghe, a veteran lawmaker and former prime minister. 

4. Why are people protesting?

Sri Lankans, who voted Rajapaksa into the presidency three years ago, are finding themselves in increasingly difficult living conditions. Households and businesses have endured power cuts since March as the government struggles to pay for energy supplies. There are long lines at gas stations and daily shortages of essential food items, which if available, are becoming prohibitively expensive. Rajapaksa’s opponents have camped out in downtown Colombo, the capital, for weeks to demand his resignation.

5. How has the government responded?

The president on May 6 declared a public emergency for the second time in two months, giving him sweeping powers to suspend laws, detain people and seize property. A nationwide curfew was imposed and local media reported the army was called out in Colombo as some protests turned violent. Dozens of people have been injured. Rajapaksa, whose powers were expanded under a 2020 constitutional amendment, condemned the violence and invited all parties in parliament to join in a national unity government to resolve the crisis. However, the main opposition Samagi Jana Balawegaya party has said it won’t join a so-called unity government and will not take any cabinet roles, indicating that more political uncertainty could lie ahead. 

6. What’s the bigger picture?

The country, off India’s southern tip, has struggled with conflict since gaining independence. Civil war between the Sinhalese-dominated government and the separatist Liberation Tigers of Tamil Elam went on for decades and killed 100,000 people. The war ended in 2009 with a government victory -- and allegations of human rights violations on both sides. There was a lull in violence until the 2019 Easter Sunday suicide bombing attacks, which killed more than 200 people and which the government blamed on a little-known Islamic group. Rajapaksa, a former military officer whom many voters view as a hero of the civil war, was elected president months later. Sri Lanka has also become a battleground in which China and India compete for influence. Rajapaksa and his family members in government have shifted the country closer to Beijing. 

7. What about the economy?

With the debt crisis mounting, Sri Lanka reached out to India for aid. The finance ministry also said it would expedite talks with the IMF for an aid package. But then-Finance Minister Ali Sabry told parliament in early May, before the cabinet was dissolved, that it may take two years for the country to emerge from the crisis. He also said the IMF program would take as long as six months to start. The Rajapaksa government had been deeply reluctant to ask for IMF help since it can involve unpopular austerity measures.

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