The paralyzing crisis has triggered massive civil unrest in the country, forcing the Sri Lankan government to impose a countrywide curfew starting Saturday evening until Monday morning. This is in addition to a state of emergency which wwas declared by President Gotabaya Rajapaksa.
But how did the South Asian nation reach here and why are people so angry at the Rajapaksa family? Here’s what you need to know …
‘Twin deficits economy’
Critics say the roots of the crisis lie in economic mismanagement by successive governments that created and sustained a twin deficit – a budget shortfall alongside a current account deficit.
“Sri Lanka is a classic twin deficits economy,” said a 2019 Asian Development Bank working paper. “Twin deficits signal that a country’s national expenditure exceeds its national income, and that its production of tradable goods and services is inadequate.”
But the current crisis was accelerated by deep tax cuts promised by Rajapaksa during a 2019 election campaign that were enacted months before the Covid-19 pandemic, which wiped out parts of Sri Lanka’s economy.
With the country’s lucrative tourism industry and foreign workers’ remittances sapped by the pandemic, credit ratings agencies moved to downgrade Sri Lanka and effectively locked it out of international capital markets.
The travel sector, specifically, is badly hit: About 30% of visitors so far this year were from Russia, Ukraine, Poland and Belarus, while Russia is also one of the biggest buyers of Sri Lankan tea, its main goods export.
In turn, Sri Lanka’s debt management programme, which depended on accessing those markets, derailed and foreign exchange reserves plummeted by almost 70% in two years.
The Rajapaksa government’s decision to ban all chemical fertilisers in 2021, a move that was later reversed, also hit the country’s farm sector and triggered a drop in the critical rice crop.
As of February, the country was left with only $2.31 billion in its reserves but faces debt repayments of around $4 billion in 2022, including a $1 billion international sovereign bond (ISB) maturing in July.
Many in Sri Lanka fear the country will default on its foreign debts.
ISBs make up the largest share of Sri Lanka’s foreign debt at $12.55 billion, with the Asian Development Bank, Japan and China among the other major lenders.
In a review of the country’s economy released last month, the IMF said that public debt had risen to “unsustainable levels” and foreign exchange reserves were insufficient for near-term debt payments.
In a note late last month, Citi Research said that the IMF report’s conclusion and the government’s recent measures were insufficient to restore debt sustainability, strongly indicating “the need for debt restructuring”.
Snubbing external help
What has worsened the crisis in Sri Lanka is the Rajapaksa administration’s resistance to foreign aid.
The country is on the verge of default as it has relied until now on help from its two major backers — India and China — and stubbornly refused wider international aid.
For months, Rajapaksa’s administration and the Central Bank of Sri Lanka (CBSL) resisted calls by experts and opposition leaders to seek help from the IMF despite rising risks.
But after oil prices soared in the wake of Russia’s invasion of Ukraine in late February, the government eventually drew up a plan to approach the IMF in April.
The IMF will initiate discussions with Sri Lankan authorities on a possible loan program in “coming days”, an IMF spokesman said on Thursday.
As Sri Lanka battles a crippling economic crisis, it’s hard to overstate the influence of the Rajapaksa clan in all this.
Gotabaya, who won office in the November 2019 presidential election, appointed his brother, Mahinda, as prime minister.
Mahinda first came to power in 2004, initially as prime minister and then as president. At the time, Gotabaya was defence secretary and was notorious for his role in the 2009 operation to end the civil war with Tamil rebels.
The Rajapaksas were out of power briefly from 2015, when Maithripala Sirisena and Ranil Wickremesinghe led the country, until Wickremesinghe was removed from his post in 2018, sparking a constitutional crisis.
The Rajapaksas’ party won a landslide victory in the August 2020 general election, and quickly restored sweeping executive powers to the presidency that had been previously curbed.
Another brother, Basil, was appointed finance minister in July 2021. He was already a controversial figure due to his American-Sri Lankan nationality — his entry into Parliament was only made possible when the government removed a constitutional provision barring dual citizens.
Others from the family also hold key positions in the cabinet.
But all the Rajapaksas in power haven’t been able to do what needed to be done to help Sri Lanka out of this mess.
(With inputs from Reuters, Bloomberg)