Political standoff in Sri Lanka worsens economic crisis

On April 1^st, Sri Lanka declared financial emergency. For the first time since independence, Sri Lanka announced defaulting on international loans on April 12^th. Huge economic meltdown and severe shortage of forex reserves forced the country to halt even energy imports bringing the nation to a grinding halt. Sky rocketing inflation, long queues for fuel, shortages of medicines, rationing of essential supplies and the 13-hour long power outages led to massive public protests. The public anger brimmed over to the streets leading to massive protests across the country and claimed an innocent live in police firing.

The grim situation in Sri Lanka inexorably signals the pernicious economic crisis of the Island nation. Sri Lanka is on the brink of bankruptcy. But more than the debilitating economic crisis in Sri Lanka, the most virulent form of dynast politics is blowing a death knell to the country now. Responding to the public ire, Sri Lankan political dispensation instead of evolving a framework to stave off the crisis, the Rajapaksas are trying every trick in the book to hold on to the power.

As a cursory measure within a week of declaring emergency, the Sri Lankan cabinet of 26 members baring the President Gotabaya Rajapaksa and his sibling Prime Minister Mahinda Rajapaksa resigned. Amid calls of “Gota go back” and calls for resignation the President, reinstated a new cabinet comprising of 17 members including majority of the old cabinet members that didn’t include family members- Chamal Rajapaksa, Basil Rajapaksa and Namal Rajapaksa. Admitting to his faults for the first time, Gotabaya expressed an intent to expedite talks with the IMF and constituted a delegation led by Finance Minister Ali Sabry¹.

The much-delayed face saver appeasement by Gotabaya failed to quell the protestors. Gaining confidence from these largely faceless organic protests, the Sri Lankan opposition party Samagi Jana Balawegaya (SJB) took the lead to muster the support of other political parties and a faction of ruling coalition who moved opposition benches in Parliament and mulled a no confidence motion. In the 225-member legislature, the opposition claims to have support of 113 which are needed to win the motion. If the ruling government loses the trust vote, cabinet will be dissolved and President can appoint a new Prime Minister.

Anticipating a threat to his position, Prime Minister Mahinda Rajapaksa proposed a move to curb the executive powers of President through the 19^th amendment². Indeed, in November 2019, after Gotabaya won the Presidential elections, the Parliament unanimously scrapped an amendment 19A that curtailed the powers of President and empowered the Parliament. In the process, Mahinda got supported from unexpected corners, the leader of UNP and former Prime Minister Ranil Wickramesinghe.

Sri Lankans who are equally miffed by the nasty politicking of Mahinda Rajapaksa, intensified calls for his resignation. Amid this growing political impasse, the President convened a meeting of political parties to discuss the most implausible prospect of the formation of an all-party government. On the face of it, while it looks like a justifiable scenario, undermining the basic essence of democracy, to avoid the prospect of facing public wrath, the President pushed this unprecedented idea.

Indeed, the Sri Lanka election commission has exhorted all political parties to come together and form a government to end the political standoff. Even business leaders and professional organisations advocated for an interim government. But the protestors demand the resignation of the Rajapaksa family members in toto. But Mahinda rejected this idea vehemently and insisted on having an interim government formed under his leadership³.

Indifferent to the protests calling for his resignation, President Gotabaya, in his May Day message urged political parties and protesting citizens to steer “Pro-people struggle”. This message which came a day after Buddhist leaders and trade unions warned Rajapaksas to resign and make way for interim government. Despite the remonstration to bring the country to halt by trade unions, Gotabaya reluctant to resign reiterated call for interim government formation as head of the state and insisted “each second, our goal is to find solutions to existing crises by resorting to methods that can alleviate the suffering of the people”⁴.

The defiance of Rajapaksas in the face of burgeoning political and economic crisis which is deepening by day is truly appalling. Sri Lanka has been under the vise grip of Rajapaksas credited for ending the 30 year long civil war since 2002. Mahinda Rajapaksa occupied the highest offices of Prime Minister and President often holding additional charge of Minister of Finance from 2002 till date intermittently baring few years of UNP coalition in power is credited with ending the three decade long civil war in the island. Gotabaya who led the armed forces during the Civil war even accumulated a similar good will and popularity of the Sri Lankan citizens.

Swept to power for the second time into power after winning the civil war, the Rajapaksas began to rule the country as a fiefdom. After the war ended, the Rajapaksa could have ushered the country into prosperity by diversifying the economy and inviting investments.

Instead of focussing attention on making the country self-reliant, Rajapaksas sustained growth through International Sovereign bonds (ISB) often borrowed at very high interest rate. Strategically playing a China card against India, Rajapaksas facilitated unrestrained flow of Chinese capital surpluses into Sri Lanka. Heavy investments in infrastructure development like highways, airports propped up the short-term growth of the country. These proverbial White Elephants envisioned with poor economic viability propositions- Colombo Port City, Colombo-Katunayake Expressway, Mattala International Airport, Hambantota Port and Ceylon Electric Company has turned out to be a drain on the economy. Tainted with corruption and low returns have increased the cumulative debt burden on the Sri Lankan economy which stands at $35 billion as of 2021.

For a decade (2003 to 2012), Sri Lanka registered a consistent growth of 6.4% that transformed the economy. Consequently, the country transited into a middle-income country in 2014. Hailing this landmark, World Bank cautioned the Sri Lankan leaders about major challenges – ensuring inclusivity in growth, enhancing role of private sector, proper resource allocation to various tiers of government, incentive productivity and exports. Simultaneously, it raised a red flag over declining tax to GDP ratio which was 11.1% and exports to GDP ratio⁶.

But the successive Maitripala government which stormed into power in 2015, failed to evolve any long term reformative economic plan for sustainable growth. A drought in 2016, exacerbated economic crisis. Though the Maitriapala government consciously avoided Chinese loans, in lieu debt swap, Sri Lanka leased Hambantota port to China for 99 years. But debts continued to accumulate due to poor financial prudence. Claiming uncontestable loyalty and commanding unflinching support of majoritarian Sinhalese Buddhists in the aftermath of 2019 bomb blasts in the island, Gotabaya became President in 2019.

Back in power, Rajapaksas announced a slew of tax cuts as part of economic relief measures- slashed VAT to 8% from 15%, halved income tax on construction companies, import tax cuts, removed debt service tax, nation building tax and introduced a 25% cut on existing telecommunication tax⁷ and enhanced threshold of income tax. The tax cuts amid the pandemic and fall in foreign tourist footfall and a decline in remittances have drastically reduced the state revenues. This gross economic mismanagement has forced the rating agencies to reduce Colombo’s credit rating close to default levels causing the country to lose overseas markets.

In a zest to become first country in the World to fully embrace organic farming, Sri Lanka banned the use and import to inorganic fertilisers in May 2021. Crop productivity suffered. To make up for the inadequate supply of organic fertilisers domestically, Sri Lanka ordered import of 99,000 metric tonnes worth from China’s Qingdao Seawin Biotech Group Co Ltd. But the consignment was rejected after Sri Lankan scientists detected harmful bacteria in the samples. Following a court order, People’s Bank of Sri Lanka withheld the payment. China besides black listing the bank, lodged a complaint against Sri Lanka at FAO and UN and arm-twisted Sri Lanka into paying $6.8 million as a compensation for the cancelled deal⁸. Sudden switch to organic farming, caused food shortages and price rise in Sri Lanka.

After this fiasco Sri Lanka quickly reversed its decision on organic farming and responding to island’s SOS call India rushed 100000 kg of nano fertilisers in October. The country’s financial recession has been in the making force several years has reached a hilt to due to a series of blundering missteps of Rajapaksas. The forex reserves plunged to $2.2 billion in 2022 from $6.9 billion in 2018. With the pending loan repayments for the year is $7 billion, Sri Lanka defaulted the payments.

Ironically, facing massive public anger, amid gruelling economic crisis, the Rajapaksas are adamant to hold on to the power. While an interim government composed of political parties of different hues might face difficulties of arriving at a consensus for implementing policies, to maintain a modicum of credibility and owing up for the disastrous financial management, the Rajapaksas should ideally make way for the much-advocated interim government. Political impasse is compounding the economic crisis and fuelling people’s angst. Pacifying the citizens and stabilising economy should be a primordial priority.

Already the worsening economic situations is compelling thousands of families to escape the food shortages and seek refuge in neighbouring countries. People are reaching Indian shores for better economic opportunities. Spill over of an exodus might eventually complicate the issues in the region. Sri Lanka played India against China and China against India to buy time and drag on its economic recession. In the face of crisis, India has ramped assistance in terms of loans, generously dispatched medicines, fuel and food supplies, urged World Bank to reclassify as low-income country for limited purpose of debt restructuring ⁹and urged IMF for financial assistance to Sri Lanka.

As a benevolent partner, India rose to the occasion to aid, assist and help Sri Lanka. To revive its economy, Sri Lanka must evolve a long-term plan for a sustainable economic growth. This can be possible with responsible and committed leaders at the helm. Sri Lanka has in the past resolutely removed incompetent leaders, reposing faith in the electoral system, the citizens must now resurrect and rebuild their country.

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