COLOMBO, Sri Lanka — When Sri Lankan President Gotabaya Rajapaksa was chased from office by protesters this month, his government became the first in the world to be felled so dramatically by the double punch of the pandemic and economic fallout from the Russian invasion of Ukraine.
Wickremesinghe, a six-time former prime minister, inherits a bankrupt nation with a collapsed economy and now faces a daunting task. The country defaulted on its $51 billion foreign debt in May. Miles-long fuel queues stretch along the streets of Colombo, sky-high food inflation has pushed people into poverty and the country’s currency has depreciated sharply.
Many economists say that the next step for Sri Lanka is a bailout package from the International Monetary Fund that has been under discussion for weeks. In a statement at the end of a visit to Colombo in June, the IMF delegation said the objectives of a support program would be to “restore macroeconomic stability and debt sustainability” while carrying out reforms and protecting the poorest.
Now, the world is looking at Sri Lanka as a cautionary tale. Kristalina Georgieva, the managing director of the IMF at the G-20 summit this month issued a dire forecast. “Countries with high debt levels and limited policy space will face additional strains. Look no further than Sri Lanka as a warning sign,” she said.
Sri Lanka, once considered a success story with high levels of education and standard of living, could now be the first among a litany of developing countries that will face political instability.
Dane Chamorro, a partner at the consultancy Control Risks, said countries ranging from Pakistan to Egypt to Kazakhstan were buckling under the “perfect storm” of economic disruption caused by the pandemic and several other shocks that all came this year.
“You have a combination of the aftereffects of the pandemic, prices of commodities shooting up because of the war in Ukraine, climate issues, and particularly, underlying political instability and bad management,” Chamorro said. But some governments have navigated the pandemic better than Sri Lanka.
“It just shows you how much impact bad management and outright corruption can really derail what would otherwise be a wealthy country,” he said.
First, the coronavirus pandemic wrecked Sri Lanka’s tourism sector — the country’s third-highest source of foreign exchange reserves — that had already slowed after the 2019 Easter bombings. From $4.38 billion in 2018, tourism earnings dropped to $500 million after two pandemic years.
The government’s ban on chemical fertilizers to promote organic farming — instituted overnight — crashed agricultural production. Generous tax cuts enacted by the Rajapaksa government cost the government $2.22 billion annually.
The war in Ukraine dealt a final blow to the country as fuel and food prices rose globally. Between February and May, the cost of Sri Lanka’s fuel imports shot up by more than 38 percent from the same period a year ago.
Even with the IMF’s willingness to help, Sri Lanka has its work cut out.
Ankur Shukla, an economist specializing in South Asia at Bloomberg Economics, said that the IMF is seeking a plan to restructure the country’s debt and discussions with a diverse set of creditors — from China to the World Bank — will take time.
“There are high chances that though an agreement [with IMF] might happen this year, the aid would not likely come this year,” he said. “There is a lot of uncertainty.”
For its immediate needs, the country is in urgent need of financing.
“The liquid external resources available with the central bank are almost nonexistent,” Nandalal Weerasinghe, Sri Lanka’s Central Bank governor, told CNN this week. All available foreign exchange resources had been used for importing gas, he said, adding that the country has secured fuel supplies for the next few weeks.
The energy crisis coupled with rising food prices has left millions of people cutting back on food. Food prices are 80 percent higher than last year, data from the Central Bank shows.
Cullen Hendrix, senior fellow at the Peterson Institute for International Economics, said that while Sri Lanka is not the only country to see protests over economic hardships, the magnitude and impact of its uprising has been striking.
“The twin fuel and food price crises are hitting at a time when public patience with many governments is already virtually nonexistent in the aftermath of the global pandemic,” Hendrix said. “And the calls for relief are coming at a time when global credit markets are tightening, closing fiscal space for these governments to address the pain with subsidies or more targeted interventions,” he added.
The country’s economic hardships prompted a political crisis and that in turn has worsened the economic woes. But even as Wickremesinghe’s selection as president has ended a leadership vacuum, he is broadly seen as an unpopular establishment figure, and this is likely to undercut political stability.
Seen as a Rajapaksa ally, Wickremesinghe’s foremost challenge will be to contend with protesters who have vowed to continue their agitation. They argue that the parliament undermined the country’s democracy by picking a president who was not elected to a parliamentary seat.
In the wake of popular demonstrations that saw protesters occupy key government buildings and homes of the president and prime minister, Rajapaksa fled the country, first to the Maldives and then to Singapore.
Hours after Wickremesinghe took the oath of office on Thursday, police and military forces surrounded the protest site and seized control of the presidential office in a predawn raid. Security forces charged at protesters with batons and demolished tents, injuring many, eyewitnesses described.
The protesters, who have camped for more than 100 days, described the president’s action as “undemocratic.”
The crackdown was condemned by human rights groups among others.
Former diplomat and academic Dayan Jayatilleka said the “rash” action of the president has aggravated an already precarious situation. “The needless use of military force has made political stability impossible which the IMF and others have said is needed for economic reform,” he said.
Hafeel Farisz in Colombo and Gerry Shih in Delhi contributed to this report.