Signs of Sri Lanka’s impending economic crisis have become increasingly apparent in the last two years of the Covid-19 pandemic, as food prices skyrocketed and power outages increased in frequency. Sri Lanka currently has about $ 7 billion in total debt due this year. Many attribute the Sri Lankan economic crisis to the mismanagement of its finances by successive governments through growing foreign debt and continued investment in infrastructure. The Rajapaksa administration also implemented sweeping tax cuts in 2019, reducing the value added tax (VAT) – the tax on imports and domestic supplies – from 15 percent to 8 percent, which helped reduce country. The president’s older brother, Mahinda Rajapaksa, is expected to step down as prime minister in a deal reached by former President Maithripala Sirisena, who joined dozens of other members of the incumbent’s ruling party in April in protest of Raj. governance. But the struggle for power in the country could have sown discord between the two brothers that could have exacerbated its political stalemate. On Friday, the Associated Press reported that a spokesman for the prime minister did not immediately confirm the removal of senior Rajapaksa, saying any such decisions would be announced by the prime minister in due course.
The country continued to increase its external debt without sufficient revenue
Much of Sri Lanka’s economic woes are its growing external debt, which is financing its aggressive infrastructure shift under former President Mahinda Rajapaksa, Rajapaksa’s older brother and two-time Prime Minister. With its finances already bleeding, Sri Lanka has taken out large investment loans from Chinese state-owned banks to finance its infrastructure projects, including a controversial port development in the Hambantota region. The Sri Lankan government has justified the Hambantota project as a way to grow its economy as a busy commercial hub comparable to Singapore. However, the project was full of corruption and stopped, and Sri Lanka eventually handed over control of the port to China as collateral, as it was unable to repay its loans. Over the past decade, Sri Lanka has amassed $ 5 billion in debt to China alone, accounting for a large portion of its total foreign debt, according to the BBC. Sri Lanka’s inflated debt to China and the failure of the Hambantota plan are often cited as examples of China’s “debt book diplomacy” over the past two decades. Some believe that China has expanded this monetary diplomacy approach through the ambitious Belt and Road Initiative (BRI), a global infrastructure project involving Chinese investment in infrastructure in parts of Asia, Africa and Europe that is later repaid as part of China’s effort to increase global influence as a growing economic power. About 139 of the 146 countries in the world, including Sri Lanka, have signed the BRI project in China. While an infrastructure project on such a global scale may offer some economic benefits to participating countries, the BRI has inevitably become a strategic way for China to gain political leverage with financially vulnerable countries throughout the Asia-Pacific region. At least 16 countries involved in the BRI project have been hit by billions of dollars in debt then leaked by China, according to an independent analysis by the Harvard Kennedy School for the US State Department. About 22% of Sri Lanka’s debt is owed to bilateral creditors – institutional investors from foreign governments – according to CNBC. Neighboring India has sought to expand its bilateral cooperation with Sri Lanka in part as an attempt to secure its influence in South Asia over China. India recently gave Sri Lanka a $ 1.5 billion credit line to deal with the country’s fuel crisis, as well as another $ 2.4 billion through currency swaps and loan deferrals from January. As the country accumulated foreign debt, its tourism sector – formerly a $ 44 billion industry and the island’s main source of revenue – was hit hard. In 2019, tourism suffered after a series of church bombings that killed nearly 300 people, including some foreigners. The following year, the Covid-19 pandemic halted tourism and other major sectors, causing a global economic downturn. Although Sri Lanka saw an increase in foreign visitors last year, the ongoing pandemic combined with Russia’s invasion of Ukraine – both of the nation’s top pre-conflict tourism sources for Sri Lanka – has continued to slow the recovery. of the industry.
A worsening crisis has sparked mass protests
The country’s problems escalated in March when the Sri Lankan government announced a 13-hour daily power outage as a way to save energy amid the ongoing crisis. Without enough power, many could not do their jobs as the financial crisis continued, causing massive unrest. Thousands of Sri Lankans took to the streets in the weeks following the power outage to protest the growing crisis in the country. On April 1, President Rajapaksa declared a state of emergency as growing unrest saw protesters clash with police. The entire Sri Lankan government cabinet resigned in protest shortly after the law was enacted, prompting Rajapaksa to repeal the law. Among those who resigned were Sports Minister Namal Rajapaksa, another member of the Rajapaksa family and the president’s nephew. With growing political unrest and a lack of resolution, Rajapaksa’s opponents have launched calls for a no-confidence motion against his government. “We are confident we have the numbers and will submit the proposal at the appropriate time,” opposition MP Harsha de Silva told CNBC. Hoping to appease critics, President Rajapaksa tried to form a new unity coalition under his leadership, but failed to win support. In April, the government also announced it would temporarily suspend foreign debt payments, marking the first time Sri Lanka has defaulted on foreign loans since independence. Experts have been warning of a possible plight in the country’s finances for some time. When the country went bankrupt, the government was negotiating a rescue plan with the International Monetary Fund, which had assessed its accumulated debt as unsustainable. “The government intends to continue its discussions with the IMF as soon as possible with the aim of formulating and presenting to the country’s creditors a comprehensive plan to restore Sri Lanka’s external public debt to a fully sustainable position,” the statement said. Ministry of Finance. . At a meeting with cabinet officials a week later, President Rajapaksa acknowledged the role of his government in the country’s declining economy. In particular, the president said the government should have approached the IMF earlier for support in tackling its unruly foreign debt and that it should have avoided banning imported chemical fertilizers intended to maintain Sri Lankan foreign exchange reserves, but instead of harming its agricultural production. “We have had huge challenges over the last two and a half years. “The Covid-19 pandemic, as well as the debt burden and some mistakes on our part,” Rajapaksa said. Now, the future of Sri Lanka depends on whether the president’s proposed changes of government will calm down his growing opposition long enough for a solution from the IMF. However, Sri Lankan finance chief Nandalal Weerasinghe said such an expected deal could be months away.
