Dark clouds have gathered over the island nation of Sri Lanka girded by the emerald waters of the Indian Ocean. Clouds that presage hunger, suffering and political chaos for the people of the crisis-wracked nation. There is 45-year-old Nilanthi Kumari who sells sweetmeats in the Colombo suburb of Thalawathugoda. She used to earn a decent income but is now struggling to make ends meet. She says the prices of wheat flour, sugar and coconut oil have doubled in a span of just a few months, making it nearly impossible for her to run her business. “My profits have dropped from Rs 50,000 a few months back to Rs 15,000 now, making it extremely difficult for me to run my family. I feel like giving up the business. But there is nothing left for me to do. It is a hand-to-mouth existence for us,” she laments.
Then there is 40-year-old Colombo taxi driver Danushka Dilhan who will tell you that he fills Rs 1,500 worth of fuel daily in his three-wheeler. With the latest price hike, his fuel bill has surged to Rs 2,500-2,800 a day. “I have no option but to increase my fare. But even then, the income is insufficient to eke out a living since fuel is now unaffordable. My earnings have drastically dropped. What I make is not enough to pay for even two square meals,” he rues.
Kumari and Dilhan are not exceptions. They echo the frustration of most Sri Lankans who are plagued by the unprecedented economic crisis that has gripped the nation. Sri Lanka, once described as the best country in South Asia, particularly because of its advanced socio-economic indices such as high literacy rate and higher life expectancy, is now engulfed by the worst-ever economic and political crisis in its post-Independence history. As an economy dependent on the $4.5 billion earned from tourism, the effect of the pandemic was devastating. But Covid-19 only exacerbated a crisis that had been brewing over the years, if not decades—a disaster waiting to happen. Foreign exchange earnings have plummeted. The fast-depleting foreign reserves are hardly sufficient to pay for a month’s import of fuel, LPG, essential foods and medicines. The country has come to a halt as politicians jockey for power and influence.
A TALE OF THREE CITIES
Sri Lanka’s economic crisis has caused enormous suffering for the poor who have been hit the hardest. However, it is largely business as usual for the elite and the upper middle-class of Colombo, except for the power-cuts. A sporadic flash of light from a fancy hotel or a tony apartment block breaking through the dark streets—lights are turned off to save electricity—of the capital is a reminder that behind the closed doors of the rich and powerful, the city still offers what it used to before the crisis.
The inequality prevalent in the country’s urbanscape is more pronounced since some luxury hotels and highrise gated communities seem unaffected by the blackouts. They simply stocked up on enough fuel to run their generators smoothly and had enough power backup. Although those in the upper echelons of society have become discreet about showing off their wealth at a time like this, live events, performances, and parties at nightclubs, bars and luxe properties across Colombo tell a different story.
Leading political economist Prof Sumanasiri Liyanage says inequality had grown in Sri Lanka after the introduction of reforms in 1977, and it started growing even faster after 2005. “It is a phenomenon of the current situation that the poor get poorer and the middle-class get poor. The rich become the middle class. However, the superrich become the superrich,” he explains.
The middle-class has been forced to curtail any extra spending on entertainment to save money to pay for their most essential needs such as school fees. As an executive in the private sector with a decent salary, Nimal Fernando, 55, earned enough to support his family as the sole breadwinner. But Fernando, a father of two children, finds this is no longer possible given the current steep surge in prices of essentials. “We have now cut down on our staples. For cooking, we have started using firewood instead of LPG. Leisure-time activities such as dining out are a strict no-no,” he laments.
Prasanna Anuruddha, 40, is another private sector executive, whose wife is a schoolteacher. The family with two children maintained a respectable lifestyle; they went on picnics at least once a month. They bought toys and special food items regularly for the children. Not anymore. “Our monthly food bill has gone up from Rs 14,000 to Rs 22,000. All other expenses are out so that we can manage our monthly household budget,” says Anuruddha.
Where there is misery there is profiteering. Smarter Sri Lankans have been anticipating the crisis. Many of them invested in cryptocurrency. Some bought properties, thus making a profit when the Sri Lankan rupee fell against the dollar. Since last year, hoarding has been rampant of sugar, flour, and cooking gas cylinders which are now being sold at five times their price.
THE DEBT CRISIS
The economic crisis is visible to anyone visiting Sri Lanka. People languish in lines for hours on end at fuel stations. There are snaking queues at cooking gas outlets. The state hospital system has run short of essential drugs endangering thousands of patients. Daily power-cuts that last for several hours, thus hampering work in offices, industrial establishments and markets. During the day, load-shedding lasts up to 13 hours. Sri Lanka has been hit by an unprecedented balance of payment crisis. Foreign debt is as high as 119 percent of the GDP. The debt repayment requirement is $7 billion this year.
The newly appointed Central Bank Governor Nandalal Weerasinghe has announced that Sri Lanka had suspended debt servicing temporarily pending an economic bailout from the IMF even as it tried to use depleting foreign reserves for the import of essential items. In 2021, the US dollar stood at 200 Lankan rupees and now it is about 370. In addition to the foreign exchange crisis, the country is short of revenue because of the government’s chronic economic mismanagement and faulty decisions.
After assuming office in 2019, President Gotabaya Rajapaksa announced wide-ranging tax cuts in November. His new government, in the hope of granting relief to the poor, reduced the value-added tax from 15 percent to 8 percent. As a result, the tax revenue dropped to 8.5 percent of GDP when it should be a minimum of 16 percent. Expenditures were 2.4 times higher than the revenue in 2021, according to the Finance Ministry. Interest payment absorbed 72 percent of the government revenue—one of the highest such ratios in the world—while salaries and wages amounted to 58 percent.
“The government’s revenue is only 8.5 percent of the GDP. We should increase tax rates to boost revenue. Otherwise, how can we run a country with such a small base of revenue?” Finance Minister Ali Sabry was concerned. He headed a delegation to Washington DC last month and held talks with the IMF for a bailout package. Sri Lanka needs at least $3 billion in bridge financing. It would take a few months for the IMF to reach a conclusion on the demands. Until such time, it is certain that hardships will continue, if not escalate.
Buddhist monks at a protest
DISGUST FOR POLITICIANS
The domino effect of the economic crisis led to social and political unrest across the country. Street protests are the order of the day, with protestors urging President Rajapaksa and his elder brother-cum-Prime Minister Mahinda Rajapaksa to resign and make way for a new set of rulers. A general dislike of all politicians is palpable among Sri Lankans. This is acute among youngsters who believe that traditional politics and politicking have led the country to the dire straits. University student Tharindu Ratnayake says corruption and fraud by politicians have ruined Sri Lanka economically. “What have they done to our country in the last 74 years after Independence? We need a better future. We need to get rid of the current lot of rulers for a new generation to take over,” says the 22-year-old protestor who is camping at Galle Face seafront.
To assuage the protestors, the entire Cabinet of Ministers except for PM Rajapaksa resigned. A new Cabinet, sans any member of the Rajapaksa family other than the PM, was appointed. But 40 MPs in the ruling coalition broke away to function as Independents in Parliament last month and demanded the resignation of the PM and the formation of an all-party interim government. This has only led to a political impasse. The main opposition parties—Samagi Jana Balawegaya (SJB) and the Janatha Vimukthi Peramuna (JVP)—are not ready to join an all-party government under the current president. “My party is not ready at all for an interim arrangement at this time.
We want everyone to resign and call for fresh elections so that public opinion prevails,” Opposition Leader Sajith Premadasa said in his May Day address in Colombo. His party moved a no-confidence motion against the government on May 3. But it looks difficult for them to secure enough numbers since the breakaway MPs have placed conditions to support the move. Says former Energy Minister Udaya Gammanpila who is now an Independent MP, “We cannot support it since the opposition does not provide any plan for the formation of the next government in case the current rule is dismissed through such a motion in Parliament.” PM Rajapaksa, however, is quoted by Daily Mirror as saying that he has numbers to defeat the motion.
In such circumstances, an election is the only option to unseat the government. However, it is unlikely at this time because the Constitution mandates that the President can dissolve Parliament only after two-and-a-half years. This means Gotabaya has to wait until next year to issue the order. Though Sri Lanka needs a government to take vital decisions to prevent matters from turning worse and making the country ungovernable, an all-party government looks unrealistic at this juncture since the opposition parties are not ready for it. It is difficult for any leader to deliver much-expected relief in the short run given the gigantic nature of economic challenges. SJB parliamentarian Harsha de Silva who is vocal about economic matters says the government reached out to the IMF but it was a day late and a dollar short. “We asked the government to strike a deal with the IMF way back. But the government did not listen. Now, it is too late. I am not hopeful of the result,” he says.
Despite the inflexible stance of the Opposition and the anti-government protestors demanding the entire government, including the president, to step down, the rulers are not ready to agree. President Rajapaksa is still trying to cobble together an alliance with all parties for an interim government. A special meeting was held between the ruling Sri Lanka Podujana Peramuna and Independents on May 2. Former Energy Minister Udaya Gammanpila who attended the talks says there was general agreement between the two sides on the proposed government to be run with a limited number of Cabinet ministers for a temporary period. “We will now talk to the opposition parties this week and try to accommodate them in the interim government. We have to sort out the current issues and ensure relief to the people as early as possible,” he says. However, matters do not seem to be running swimmingly for the proponents of such a government. The opposition’s demand is the resignation of the entire government which seems highly unlikely.
INDIA’S HELPING HAND
The unfolding catastrophe in Sri Lanka has drawn international attention and opened up avenues for closer ties with New Delhi. India was the first country to lend its assistance to foreign currency-starved Sri Lanka. It offered a $500 million credit line to purchase fuel. The country’s predicament would have been direr had it not been for this assistance since all transportation in Sri Lanka would have ground to a halt. Another Indian credit line of $1.5 billion is now in use for the import of essential items like food and medicines. But in foreign and bilateral affairs, nothing comes free. In the latest engagements between the two countries, Sri Lanka reciprocated by agreeing to implement many India-financed projects and sign defence-related agreements.
The two neighbours are set to develop the Trincomalee Oil Tank Farm jointly. The Adani Group is investing in the development of the West container terminal in Colombo port. Likewise, it will invest in energy projects in the north and the east of Sri Lanka. These projects can be viewed more as strategically important for India than in economic terms. Sri Lanka and India are now positioned to see greater connectivity—grid connectivity is a topic under consideration. In addition to direct economic aid, India has offered assistance to Sri Lanka in its engagement with the IMF. It is in New Delhi’s strategic and geopolitical interests to keep Sri Lanka in its orbit. India has pursued these projects for a long time under different Sri Lankan governments.
Nevertheless, such an increased Indian presence is bound to whip up political sentiments in Sri Lanka. It has happened in the past. There is no guarantee that it won’t happen again in the future. Sri Lankans, particularly the majority Sinhalese community, are sceptical about India’s involvement. Such reservations have been triggered over India’s longstanding position regarding a credible power devolution based on the 13th Amendment to the Constitution of Sri Lanka to the northern and eastern provinces of the country. But all mainstream political parties in the country have now come to realise that ties with India should be maintained properly for both the political and economic future of Sri Lanka. Former foreign secretary Prasad Kariyawasam says India-Sri Lanka relations are historic dating back to the era of Emperor Ashoka. “India is important to Sri Lanka as its closest neighbour. Sri Lanka is also an important hub in the Indian Ocean. It should maintain mutually beneficial ties with India in a manner that addresses our concerns,” he adds.
The importance of healthy bilateral relations became apparent during the pandemic and the current economic crisis. India rushed to help Sri Lanka during the early stage of the vaccination drive against Covid-19. It donated 500,000 doses of AstraZeneca vaccines in January last year. Such assistance has empowered Sri Lanka to face the economic crisis. No matter the anti-India sentiments on the island, for political or ideological reasons, balancing ties is and will be a delicate process for Sri Lankan politicians, both present and future.
Otherwise, it will be difficult to realise the full benefits of bilateral ties. This is evident in the non-implementation of some of the projects despite the agreements inked between both sides. The latest example is the unilateral abrogation of the Colombo East Container Terminal Project by Sri Lanka following mass protests. The Cabinet took the decision in February last year after pressure from within and outside despite Sri Lanka’s commitment made in an MoU with India in 2017. Despite the president’s political will to proceed with the project, he had to give in to popular objections. Moreover, many such projects remain on paper, hindered from taking off by protests. Now, current developments have opened up opportunities for both sides to explore fresh avenues to enhance ties.
NOT A CHINESE CHECKOUT
Sri Lanka’s new chumminess with India takes place at a time when Colombo’s ties with Beijing have soured. During the initial stages of the pandemic, Beijing helped Sri Lanka with Sinopharm vaccines. However, relations suffered for reasons such as the rejection of a fertiliser consignment imported from China, the suspension of a wind power project in the northern islands at the insistence of India and the exclusion of a Chinese company from the execution of the final phase of the Colombo-Kandy central expressway. China is unhappy with Sri Lanka for seeking IMF assistance. “China had done its best to help Sri Lanka to avoid default, but sadly they approached the IMF and decided to default,”
Ambassador Qi Zhenhong told reporters in April. But he sounded somewhat different on May 2 during a meeting with Finance Minister Sabry. After the meeting, the top diplomat said his country, a major shareholder of the IMF, is willing to actively encourage the agency to positively consider Sri Lanka’s difficulties and reach a proper agreement as soon as possible. Despite being miffed by the latest India-Sri Lanka developments, China will not abandon the island totally because of its geopolitical interests. In recent times, China’s geopolitical rivalry with India began to play out openly in Sri Lanka. During the Chinese ambassador’s visit to the country’s north in December last year, Sri Lankans joked that the north is India and the south is China.
India has special political and strategic interests in the north and the east where the majority are Tamil-speaking people. The latest foray into the north by China is undoubtedly an irritant to India. China knows it all too well. Still, China has started engaging the Tamils there, by making donations to the fisheries community. During the visit, the ambassador went to the northernmost tip of Sri Lanka. While gazing over the Indian Ocean, he asked in a lighter vein those around him whether he was looking at India. The ambassador has promised to visit the eastern province this month. “I received an overwhelming welcome from people in the north. After that, I received invitations from people in the east,” he explained.
China is obviously not ready to totally cut ties with Sri Lanka. It cannot afford to. It has competing interests with India. It is in a precarious position to walk the tight diplomatic rope vis-a-vis Sri Lanka. India can read and understand Sri Lankan politics better than any other country because of the geographical and cultural proximity of both countries. Said Foreign Secretary Jayanath Colombage, “On security, we have an India first policy. But we want economic ties with China, too.” Beijing is rigorously engaging Colombo to sign a Free Trade Agreement (FTA)—a process initiated six years ago but remains stalled. It is expected to start soon. PM Rajapaksa has assigned his secretary to work out the modalities to resume negotiations. China advocates the FTA as a better option for Sri Lanka to tide over the foreign exchange crisis in the long run. Sri Lanka has to strike the right balance to reap the maximum benefits from its relations with the two Asian economic powerhouses without pitting one
against the other.
Meanwhile, the political cauldron is boiling over. News of an investigation by the Australian Broadcasting Corporation (ABC) alleging that former Sri Lankan minister Namal Rajapaksa—son of PM Rajapaksa and nephew of President Rajapaksa—got over a million euros in payoffs from Australian medical firm Aspen has muddied the waters though both parties have denied the allegations.
The refrain of demonstrators camping at Galle Face seafront near the President’s Office in Colombo, and elsewhere on the island, is “Gota go home”—“Gota” being President Gotabaya Rajapaksa. In such a situation, there is no easy way out of the crisis for Sri Lanka.
All political parties are polarised despite the gravity of the situation since they are more concerned about their future political prospects. For now, the rallies, which are marked by an almost festive and colourful air, seem to have united all of Sri Lanka. Many Buddhist monks, the vanguard of the Sinhalese majority, are present at the protests. Gotabaya, who came to power on Sinhalese sentiments—at his inauguration, he had said, “I knew I could win this presidency through Sinhalese votes alone”—is facing a combined nation which is seething at the political and economic mismanagement of decades that have led the country to the brink of mass poverty and hunger.
The Decline Through the Years
2020 The economy shrinks by a record 3.6 percent because of the Covid-19 pandemic.
March 2021 The government bans imports of vehicles and other items, including edible oils and turmeric, an essential spice in local cooking, to save foreign exchange.
April The recession is compared with a 2.3 percent GDP growth in 2019, the Central Bank says in its annual report for 2020.
June The government announces that it will not borrow from the international market and instead will seek to attract investment and enter into swap agreements with neighbours.
June 27 The Sri Lankan Central Bank tells banks not to request dollars from the banking regulator’s depleted foreign currency reserves.
Aug Sri Lanka receives its share of the global SDR allocation by the IMF and the initial disbursements under the bilateral currency swap arrangement between the Central Bank and the Bangladesh Bank.
Oct The Central Bank expects the falling trend in foreign remittances to reverse from this month.
Nov Sapugaskanda Oil Refinery is shut down for 50 days following the non-availability of crude oil supplies due to the foreign exchange crisis.
Feb 2, 2022 Export-Import Bank of India enters into a pact with Sri Lanka to provide the $500 million line of credit for purchasing petro products
March 9 Central Bank Governor Ajith Nivard Cabraal at a meeting with bankers announces that the Sri Lankan Rupee is floated.
March 17 Sri Lanka signs $1 bn credit line with India for procurement of food, medicines and other essential items.
March 21 The first shipment of 35,000 metric tonnes of diesel under the $500 million credit line from India arrives in Colombo.
March 31 Hundreds of protesters storm President Rajapaksa’s residence in Mirihana revolting against the power-cuts that had reached over 12 hours a day.
April 4 Central Bank Governor Cabraal resigns along with the entire Cabinet, excluding PM Rajapaksa.
April 9 A mass protest near the Presidential Secretariat commences with the participation of a large number of people, including youths from across the island.
April 12 The Finance Ministry announces it would default on its $51 billion external debt pending a bailout from the IMF.
April 17, 2022: A high-level delegation leaves the country to participate in discussions with the IMF.
April 19 India urges the IMF to urgently provide financial assistance to Sri Lanka to help the island nation cope with its economic crisis.
April 20 The IMF informs Sabry that it would consider financial assistance under the Rapid Financial Instrument though it is outside the standard circumstances.
May 2 Chinese Ambassador to Sri Lanka Qi Zhenhong reiterates China’s fullest support for Sri Lanka in securing the assistance of the IMF.
$7billion The debt repayment requirement
119% Of the GDP is the foreign debt
2.4 times Higher were expenditures than the revenue in 2021
$4.5 billion Sri Lanka earned yearly from tourism before covid hit
$500 mn The first credit line India offered Sri Lanka to purchase fuel
$1.5 billion Another Indian credit line now in use for the import of essential items like food and medicines
15% to 8% President Rajapaksa’s new government reduced the value-added tax in 2019, resulting in a tax revenue drop to 8.5% of GDP against a minimum requirement of 16%
72% Of the government revenue is absorbed by interest payment—one of the highest such ratios in the world; salaries and wages amount to 58%
How the neighbours are placed
✥ Stands the chance of responding first to a crisis in Sri Lanka, its closest maritime neighbour.
✥ Has necessary resources to do so. Has better soft and political engagement in Sri Lanka.
✥ Can read and understand Sri Lankan society, culture, politics and developments better than any other country.
✥ Shares common cultural and civilisation ties with Sri Lanka.
✥ Given the democratic model of governance and rigid bureaucratic rules, the Indian response in terms of humanitarian assistance is sometimes delayed.
✥ Financial power is smaller compared to China.
✥ Cannot dictate the private sector on investment destinations.
✥ Can expedite work on the development of the Trincomalee oil tank farm through the proposed joint venture, and power projects in the north and the east.
✥ Sri Lanka badly needs energy security—both fuel and electricity. It is an opportunity for both sides to have cooperation in this regard.
✥ India can follow up with security cooperation with Sri Lanka.
✥ Indian involvement is viewed by a section of political parties and people as an infringement of Sri Lanka’s sovereignty.
✥ Has bigger financial power to invest in Sri Lanka which badly needs them now.
✥ Has proven efficiency in resource mobilisation in responding to Sri Lanka’s requests.
✥ Is better positioned as one of the key lenders to assist the island to get over the debt crisis.
✥ Chinese investments are not seen with scepticism by Sri Lankans.
✥ Does not have a better understanding of Sri Lankan politics compared to India.
✥ Their projects are interpreted by some sections as corrupt deals.
✥ Chinese linkages with the political parties of Sri Lanka are not as good as those of India.
✥ Sri Lanka is under pressure from the West to reduce the presence of the Chinese.
✥ China and Sri Lanka can work on the proposed Free Trade Agreement to enhance bilateral trade volume. It can be used as a way to top up the fast-dwindling foreign reserves of the crisis-ridden country.
✥ China stands a better chance of sending more and more Foreign Direct Investments. Therefore, they can secure more investments.
✥ Heavy involvement of the Chinese is also seen by some Sri Lankans as the country becoming a Chinese colony.