SRI LANKA is currently facing its worst economic crisis yet. Struggling to feed its population of 22 million, the government has officially announced a default on all foreign debt, thereby temporarily suspending all foreign debt payments. With more than $50 billion in external debt, Sri Lankan authorities have officially undergone discussions with the International Monetary Fund (IMF) to negotiate a bailout plan[1]. The intensifying violent protests demanding the government to take accountability further increases international concern.

The brewing economic crisis 

   The country’s economic crisis, which has persisted for several years, has deteriorated in recent months due to the depletion of foreign reserves. Sri Lanka’s rapid economic decline can be attributed to various factors that have accumulated over the years. A significant contributor was the large tax cuts issued by the Sri Lankan government in 2019. In line with the promises made by the newly elected president Gotabaya Rajapaksa, value-added tax was reduced from 15% to 8%, along with the termination of seven other taxes[2]. These sweeping tax cuts resulted in an extreme loss of government revenue and irreversible damage. 

   In addition to the tax cuts, the government made the reckless decision to transition into a fully organic agriculture system, banning the imports of synthetic fertilizers. While the original intention was to save money on fertilizers and benefit farmers, the forceful conversion to organic cultivation caused a drastic fall in agricultural production. Rice production fell by 20%, and $450 million worth of rice was imported to fulfill demand[3].

   Another important contributor was the unsustainable mounting of foreign debt despite an unsteady source of government revenue. Sri Lanka’s $50 billion external debt largely consists of International Sovereign Bonds (ISB)[1], which are debt securities[4] that can be obtained much more easily than the loan schemes provided by the IMF or the World Bank[5]. In an interview with The Yonsei Annals, Dr. Muttukrishna Sarvananthan, a development economist and researcher at the Point Pedro Institute of Development in Sri Lanka, explained that the problem did not lie in the ISBs per se, but in the investment towards “financially unviable mega prestige infrastructure projects” that were undertaken from 2007 to 2022. These projects were found to be white elephants[6], which ultimately contributed to the economic crisis. 

   The COVID-19 pandemic intensified such economic problems as major revenue-producing industries, like the tourism industry, were devastated. The pandemic, combined with the 2019 Sri Lanka Easter bombings, prevented the industry from bouncing back[7].

   The persistent economic crisis instigated irreversible damage to the Sri Lankan people’s lives. The price of essential goods such as rice, fuel, and milk has increased sharply, with onions, rice, and dhal[8] doubling in price and inflation rising by 18.7% in March alone[9]. An interview conducted by Aljazeera found that citizens living in squatter settlements have been eating almost half of what they used to consume before the economic crisis. Moreover, the price of commonly used medication, such as antibiotics and painkillers, increased by almost 40%, exacerbating the fragility of the healthcare system during the COVID-19 pandemic[10]. 

Political upheaval

   Nation-wide protests against the current government have broken out, demanding President Gotabaya Rajapaksa to resign. Members of the Rajapaksa family have been prominent political figures throughout Sri Lankan history, but in the wake of disastrous mismanagement, the dynasty is on the verge of collapse. Originating in Colombo, the capital of Sri Lanka, protests have spread all over the island and have become increasingly violent. Protestors have wrecked buses, set the homes of government officials and politicians on fire, and destroyed a national museum in honor of the Rajapaksa family’s rule among other violent acts against the regime[10]. The growing number of riots led President Rajapaksa to declare a state of emergency and a nationwide curfew. In an effort to disperse the crowds, the police have been using tear gas and water cannons. Armed military personnel have also been ordered to use live ammunition against those violating the new rules[4]. Despite these measures, the demonstrations have only become more heated, with anti-government protestors clashing with government supporters and the police.

   In an attempt to alleviate public anger, President Rajapaksa announced that a new cabinet would be appointed, while also proposing to establish a unity government or an all-party government in April. To facilitate the reconstruction of the cabinet, all 26 ministers resigned last month, followed by the Prime Minister, the president’s brother’s, resignation in mid-May[11]. However, the opposition has refused to join hands with Rajapaksa to create a unity government because of their loss of legitimacy, and anti-government protests have not died down. Nevertheless, President Rajapaksa is unyieldingly refusing to step down[11].

International support for Sri Lanka

   Amid political turmoil, multiple countries and global institutions have agreed to help Sri Lanka get back on track with its debt payments. The World Bank will be providing $300 million to $600 million over the course of four months, and Sri Lanka is in the middle of negotiating a bailout plan with the IMF. The institution has agreed to support the country’s return to a sustainable position[12]. Furthermore, India has already acceded to providing $500 million to buy fuel, while discussing the further extension of a credit line that has already been extended by $200 million. China also pledged to provide $31 million in emergency aid and various other essential goods[12]. 

   Nonetheless, there are conflicting views about China’s involvement in Sri Lanka’s economic crisis. Concerns have arisen regarding China’s contribution to the crisis, citing how the government may be attempting to gain political leverage over Sri Lanka, as 10% of its foreign debt belongs to China[7]. Alternatively, others argue that the situation is too complex to point the blame solely on China—the majority of Sri Lanka’s debt stems from ISBs and the incompetency of the administration’s financial policies in the past decades[13]. While China and India’s strategic competition over Sri Lanka is evident, Dr. Sarvananthan explains that as “China and India only account for around 12% of the total debt stock as of April 2021,” these emerging economies have a “limited capacity to substantially help an ailing economy such as that of Sri Lanka.” He further argues that the “anticipated bailout by the IMF and other commitments by the World Bank, China, and India would not be sufficient” in bringing Sri Lanka out of its crisis, stating that “the causes of the current economic crisis are multiple and very long-running that require fundamental structural and institutional reforms to the economy of Sri Lanka.”

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   The future of Sri Lanka seems grim. The population will most likely continue to suffer from the immediate effects of ongoing poor governance. Although the country will be receiving support from global institutions and neighboring countries, as Sarvananthan expressed, “political stability is sine qua non for economic revival.” With Ranil Wickremesinghe, a close associate of the Rajapaksa family, sworn in as the new prime minister tasked to mollify the situation, the fundamental problem is yet to be uprooted.

[1] Deutsche Welle

[2] ABC News

[3] Foreign Policy

[4] Debt securities: Represent borrowed money that must be repaid

[5] First News

[6] White elephant: Something that requires a lot of money but yields little profit 

[7] Vox

[8] Dhal: A South Asian dish made of lentils 

[9] Aljazeera

[10] BBC

[11] Guardian

[12] Reuters

[13] The Conversation