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Storm in the Island: On the Cusp of Lankan Spring

Sacaria Joseph Sacaria Joseph
18 Jul 2022
The Rajapaksas who ran the nation’s government as their family enterprise are largely responsible for its present economic crisis

‘Gota Go Home’ is a slogan that Sri Lankans will remember for years to come. It provided the required impetus for the people’s coup that sent the Gotabaya Rajapaksa-led government home as the people of Sri Lanka realised that Gota (nickname for Gotabaya Rajapaksa), their President, and his Cabinet have no solution for the woes of the island nation. This slogan reminds us of the Arabic slogan,Ash-shaʻb yurīd isqāṭ an-niẓām(the people want to bring down the regime), which impelled the Arab Spring that brought down several corrupt governments in North Africa and West Asia, starting with the Tunisian government.  

The Arab Spring, a wave of pro-democracy protests in North Africa and the Middle East, began with the suicide of a Tunisian street vegetable vendor called Mohamed Bouazizi in 2010 owing to the harassment of the corrupt Tunisian police who would not return him his confiscated weighing scales without a bribe. No one ever thought that Bouazizi’s death would result in the Tunisian Revolution leading to the ouster of President Zine El Abidine Ben Ali.

From Tunisia, the steam of the Arab Spring spread to other countries such as Libya, Egypt, Yemen, Syria, and Bahrain, where either the ruler was deposed, or a major uprising, insurgency or civil war took place. Arab Spring also led to sustained street demonstrations in Morocco, Iraq, Algeria, Iranian Khuzestan, Lebanon, Jordan, Kuwait, Oman, and Sudan. Minor protests took place in Djibouti, Mauritania, Palestine, Saudi Arabia, and Moroccan-occupied Western Sahara. Now the steam of that revolutionary spirit seems to have arrived in Sri Lanka and done its job metamorphosing itself into a ‘Lankan Spring,’ if I may say so.  

‘Gota Go Home,’ the slogan of the ‘Lankan Spring,’ emerged out of the woes of the island nation under the sway of the Rajapaksa family over the political landscape of the country for the most part of the last two decades. The Rajapaksas who ran the nation’s government as their family enterprise are largely responsible for its present economic crisis -- the worst since its independence from Britain in 1984 -- that has assumed the proportion of a humanitarian crisis. How did the Rajapaksa push Sri Lanka this far?

After the defeat of the Liberation Tigers of Tamil Eelam (LTTE) in 2009, Sri Lanka kept issuing sovereign bonds with high coupon rates when interest rates across the world have been low.  Today the country is sitting on foreign debt amounting to $51billion which it is unable to repay. Sri Lanka is desperately in need of $7 billion to service its overall debt by the end of the year, and it requires about the same amount every succeeding year for the same purpose for a long time to come. In May 2022, it defaulted on a foreign debt interest payment of $78 million to its bondholders -- its first-ever default -- which led the credit rating agencies to declare that the country has defaulted.

Credit rating agencies started downgrading the creditworthiness of Sri Lanka already in 2020 which automatically lowered the confidence of investors and creditors making it harder for the country to borrow money from the international market. In April 2022, Fitch and S&P Global Ratings, two of the world’s largest credit rating agencies, said that Sri Lanka was on the verge of defaulting on its debts. Today, Sri Lanka is a pariah in the international financial market.

Many economists are of the view that instead of trying to pay back its debts and deplete its foreign currency reserves, Sri Lanka should have approached its creditors for restructuring the debts to make the payment feasible. When the country started approaching the creditors for restructuring its debts, it was too late.   

Developments such as these alongside the raising of interest rates by the Federal Reserve led to the depreciation of the country’s currency to about 80% against the US dollar and inflation running riot. Unable to pay salaries to its employees, the country took to printing money as a desperate remedy. In 2021 alone it printed 1.2 trillion rupees and in the first quarter of 2022, another 588 billion which resulted in an increase in the money supply. Expectedly, inflation soared to more than 54% while food inflation soared to over 80%. If to print money at this juncture was to invite trouble, not printing money would have been to invite more trouble. Sri Lanka is caught in a vicious circle and its 22 million people are neck-deep in trouble.   

In view of securing a bailout loan of $3 billion, Sri Lanka has approached the International Monetary Fund (IMF) which works toward stabilising the world economy. The IMF bailout is nothing new to Sri Lanka that received IMF loans 16 times since 1965. Nevertheless, the IMF would not extend its financial assistance unless Sri Lanka agrees to implement certain proposed disciplinary measures in its fiscal policy, such as the raising of taxes and interest rates. Sri. Lanka must also get all its foreign creditors to agree to restructure the debts it owes them before the IMF loan can be rolled out. 

When Gotabaya took office, Sri Lanka had modest foreign currency reserves of about $7.5 billion.  As per the report of the finance ministry in Sri Lanka, in July 2022, that amount dropped to just about $25 million whiles the country needs about $500 million for its monthly import of fuel alone. As a result, it is unable to buy fuel from the international market; and no country is willing to sell fuel on credit to Sri Lanka. Since the beginning of 2022, the acute fuel crisis in the country resulted in the meteoric rise of petrol and diesel prices which left the government with no choice but to restrict the sale of fuel only to essential vehicles. The fuel crisis led the government not only to close schools and other institutions and ask people to work from home but also to request the country’s expatriates to send money home to finance the import of fuel and other essential items from the international market.  

Alongside fuel scarcity, Sri Lanka is facing scarcity of food, medicine and other essential goods. According to the report of the World Food Programme, the food-assistance branch of the United Nations, nine out of ten Sri Lankan families are either skipping meals or eating less. Government servants are given an extra day off every week to grow vegetables and other crops in their own kitchen gardens. In the meantime, the government is encouraging its public sector employees to go abroad to find work for five years on unpaid leave without having to compromise their seniority and pension once they come back to the country. As per the Sri Lankan government data, the number of people desperately making passports to leave the country has risen exponentially in 2022.   

What is unfortunate is that Sri Lanka’s economic crisis is voluntary. It was the government’s inefficient economic management that brought the Sri Lankan economy to its knees. In 2019, as an incentive to spend, against the advice of economists, President Rajapaksa introduced deep populist tax cuts which according to his finance minister Ali Sabry led to a revenue loss of more than $1.4 billion a year. The government’s irresponsible subsidisation of fuel also contributed to the collapse of the economy.

The large-scale unwarranted infrastructure spending that the government initiated was a major contributor to the accumulation of external debts 15% of which is to China under the Belt and Road Initiative (BRI), a project that Washington refers to as Beijing’s ‘debt- trap.’ Sri Lanka built its Hambantota port (a loss-incurring project) with a $1.3 billion loan from a Chinese state-owned bank, and in 2017, it had to lease out the management of the port to China for 99 years because of its inability to pay off the debt. A major portion of the Chinese infrastructural funds under BRI goes into the payment of Chinese contractors and firms that execute the project. Sri Lanka has learned better than any country how BRI is a deadly debt trap.   

The 21 April 2019 suicide bomb attacks in the commercial capital Colombo, and in Dehiwala, a suburban area of the capital, send shock waves among foreign tourists who were a major source of foreign currency in the country. As foreign tourists started avoiding Sri Lanka for security reasons, the Covid pandemic brought the tourism industry to a grinding halt. The pandemic also affected adversely the remittances from Sri Lankans living abroad.

The shortage of foreign currency prompted the government in 2021 to ban the import of chemical fertilisers and ask the farmers to use locally made organic fertilisers. Though reversed in the same year, this ban resulted in the inevitable extensive failure of crops leading to a shortage of food necessitating the import of food items, especially rice. The unavailability of chemical fertilisers led to reduced production and export of tea and rubber. The Ukraine-Russia war and the rising energy prices globally contributed to furthering the woes of the country. Consequently, Sri Lanka’s foreign currency reserves got depleted further. P Nandalal Weerasinghe, Governor of the Central Bank of Sri Lanka, told the BBC, “If we had taken the decision to go to the IMF earlier, if we started the debt resettlement process one year before, we could have managed the situation without this kind of suffering in this country.”

While the people suffered unparalleled distress, the lawmakers lived in great opulence. The people wanted a remedy to the problems for which their government and its lawmakers are almost single-handedly responsible. Since April 2022, they have been asking for the resignation of President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa. After the violent clashes between anti-government protesters and the supporters of the government in Colombo, Mahinda Rajapaksa resigned in May. Chanting the slogan, ‘Gota Go Home,’ they kept demanding the resignation of the unrelenting President who probably thought he was indispensable. After all, Gotabaya is a war hero who brought an end to the Sri Lankan civil war while serving as the defence secretary when his brother Mahinda Rajapaksa was the President.   

As a desperate remedy, Gotabaya appointed his finance minister Ranil Wickremesinghe (who had been the Prime Minister five times earlier but never completed his term) as the new Prime Minister. Wickremesinghe’s job was certainly not an enviable one. He was brought in to re-establish the diminishing credibility of the country at the international level and negotiate with the IMF for a bailout. In his effort to refurbish the crumbling economy, Wickremesinghe raised taxes and made himself unpopular among the people.

In fact, Sri Lankan people were unhappy with Wickremesinghe’s appointment as Prime Minister. They wanted the resignation of both the President and the Prime Minister. Neither of them was willing to resign. The simmering public anger led to thousands of protesters from various towns and villages converging on the Sri Lankan capital, Colombo, on 9 July 2022 and taking over the official residence of the President and the private residence of the Prime Minister and setting the latter ablaze. With bated breath, both the people of Sri Lanka and the international community are looking forward to a new government after the resignation of both President Gotabaya and Prime Minister Wickremesinghe. 

Leaving populist fiscal policies behind, the new Sri Lankan government in waiting should embark on a disciplined fiscal trajectory if it has to rebuild the nation’s economy. No matter who forms the next government, the much-required fiscal discipline is not going to be popular. People’s resentment towards the new government is likely to set in as it begins to function. One can only hope that after the example of the Arab Spring that turned into an Arab Winter, the Lankan Spring does not turn into a Lankan Winter.

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