Read how Sri Lanka ended up in its present situation and how it affects the world.
BY HELEN HERNANE
Over 4.9 million people or 22 percent of the Sri Lankan population are in desperate need of aid as the country’s worst economic and financial crisis rages on.
But the country’s poorest aren’t the only ones struggling with the fallout. In a matter of a few years, the middle-class population went from having enough savings, looking forward to a decent retirement, and enjoying a relatively comfortable lifestyle to relying on government rations to be able to eat twice a day and waiting in line for hours for fuel, if there are any.
Located in the Indian Ocean, the island country of Sri Lanka’s gross domestic product (GDP) per capita in 2019 was higher than that of the Philippines, Egypt, Vietnam, and India. In fact, things were looking up for the country as it had been ten years since the end of the 30-year civil war.
BEGINNING OF THE FALL
Tragedy struck in April 2019. A series of coordinated suicide bombings in churches and hotels resulted in hundreds of casualties. The terrorist attack, or the Easter Sunday bombings, had a drastic impact on their tourism industry—leading to a 70 percent drop in tourist arrivals in the month that followed and an over 60 percent drop by June.
In 2018, the tourism sector accounted for 5.6 percent of the country’s GDP. It is also the fifth largest source of foreign currency, earning US$4.4 billion that year. Two years later, however, the oncebooming industry was struggling to recover from the consequent effects of both the terrorist attack and the COVID-19 pandemic. By 2020, it was responsible for only 0.8% of GDP.
As terror enveloped the country following the bombings, former defense minister Gotabaya Rajapaksa who had a strongman reputation won by a landslide in the presidential election held on November 2019. He then named his brother, former president Mahinda, as prime minister. President Rajapaksa, who had a parliamentary majority, soon appointed family and friends in various government positions. This move was nothing new, however, as there were already more than 40 family members in government posts by the time of his brother Mahinda Rajapaksa’s second term as president from 2010 to 2015. President Gotabaya, or Gota as he is called, was asked about their family’s penchant for nepotism during an interview with Al Jazeera. Rajapaksa merely said, “People keep voting Rajapaksa family members [to power]. What can I do? When they do not wish to see them anymore, they will kick [the Rajapaksas] out.”
Perhaps he spoke too soon. Still, Rajapaksa expected to win over the people and gain long-term popularity by fulfilling a major election promise—huge tax cuts. By the end of 2019 and early 2020, the tax cuts included the reduction of value added tax (VAT) from 15 to 8 percent; the reduction of the telecommunication tariffs tax by 25 percent; and the elimination of the economic service charge, Nation Building Tax, capital gains tax on the share market, VAT on sovereign property, Pay as You Earn (PAYE) Tax, debit tax on banking and financial institutions, credit service tax, and the withholding tax on interest income.
The result was the reduction of the tax paying population base by roughly one million. For Sri Lanka, a country already dealing with prevalent tax evasion, this proved to be disastrous. In theory, however, the populist move was designed to provide people more disposable income which, in turn, would spur the economy. But that wouldn’t be the case for them, a realization that finally dawned on the government this year. On May 31, 2022, the government announced an increase in VAT from 8 to 12 percent (effective immediately) and corporate income tax from 24 to 30 percent (starting October 2022). These are expected to add revenue of around US$180 million and US$145 million, respectively.
Unfortunately, this was not the last decision of Rajapaksa that had catastrophic results despite the promising premise. After the election, Rajapaksa had a decade-long plan to transition Sri Lanka into organic farming. In April 2021, however, the government suddenly implemented the complete ban on the importation of chemical fertilizers and pesticides—an ice-cold bath that shocked the nation’s agriculture industry.
The supposedly environment-friendly move led to a 20 percent drop in rice production, causing a 50 percent increase in rice prices within seven months. Over 30 percent of the country’s agricultural land was left unused and the country had to resort to importing rice from China and Myanmar, something that was nearly unheard of before the ban on agrochemicals. Aside from rice, Sri Lanka had also begun importing sugar, wheat, milk powder, and other commodities. These imports ate up the foreign exchange reserves which went from US$4.06 billion in June 2021 to only US$1.92 billion by April 2022.
With Rajapaksa’s biggest decisions under scrutiny, many experts also link Sri Lanka’s downfall to the expensive infrastructure projects that eventually yielded little to no income. To finance the construction of these gargantuan, attention-grabbing projects, the government had to borrow billions from China.
These Chinese loans do not account for the biggest chunk of their debt portfolio (only 9.83 percent), however, as Sri Lanka also took out multibillion-dollar loans from other countries and financial institutions. In terms of share, their International Sovereign Bonds account for nearly half of their debt stock (47.40 percent) while their loan from the Asian Development Bank (ADB) accounts for 12.72 percent. Sri Lanka also has loans from the World Bank (9.25 percent), Japan (9.54 percent) and India (2.60 percent). But their extravagant infrastructure projects were funded by Chinese loans that they eventually could not pay, leading many analysts to think the worst. According to an Observer Research Foundation paper, “China’s liquidation techniques and hidden debts in various projects also reflect the problematic outcomes of Beijing’s economic imperialism.”
Like Rajapaksa’s decision with the ban on agrochemicals and the tax cuts, there was hope that these infrastructure projects (initiated during Mahinda’s presidency) would benefit the country. Construction of the Colombo Port City which covers over 269 hectares of reclaimed land is expected to be completed by 2043— and will only earn income by then. The Sri Lankan government eventually couldn’t pay for the debt generated by the construction of the US$1.4 billion port city and resorted to leasing 43 percent of the port to China for 99 years.
China also funded a couple of other infrastructure projects in the country: a barely-used US$15.5 million conference center, the Mattala Rajapaksa International Airport which was once dubbed by Forbes as “The World’s Emptiest International Airport,” Narocholai coal power plant, and Colombo International Container Terminal. The crown jewel of these multimillion-dollar infrastructure projects was the US$104 million Lotus Tower—a glimmering skyscraper that is supposed to boost tourism with its revolving restaurant, 400-persons-capacity conference halls, 1000-seat auditorium, museum, observation gallery, and luxury hotel rooms. It was inaugurated in 2019, but was never opened to the public.
Economists and experts advised against most of these projects, especially those part of the Hambantota project. The Rajapaksas went ahead anyway despite studies showing their infeasibility as these politically-charged decisions were seen to benefit the Hambantota district, their home and stronghold. As expected, these projects failed to generate any of the supposed income and in some cases, even recorded huge losses.
“GO, GOTA. GO!” With the series of mistakes that could be traced back to major economic and financial decisions made by the government, it seems the people now want them out. For weeks Sri Lankans have been taking to the streets in protest calling for the resignation of President Rajapaksa. In retaliation, the government allegedly sent counter-protesters or “goons” to violently disperse the protesting crowd which had been relatively peaceful at that point. Enraged, protests have since escalated in violence, storming (and in most cases, setting on fire) the homes of Rajapaksa allies, even going after Prime Minister Mahinda’s residence. Fearing for his life, Mahinda stepped down from his post and evacuated his home at 4 am with the help of the army. And he’s not the only Rajapaksa who has stepped down from their Cabinet post and other government officials have also left. Multiple clashes have been going on all throughout the country and in one instance, a parliamentary member belonging to Rajapaksa’s party was killed in his car along with his bodyguard.
With the violent chaos and supplies running out, the government declared a nationwide state of emergency. And in April, the country defaulted on its debt. Rajapaksa has turned to the International Monetary Fund (IMF) for a bailout, but it would mean some conditions on budget cuts and trade. Neighboring country India has also offered to help, along with China.
Despite the aid, it doesn’t look like Sri Lanka will be recovering anytime soon. Rajapaksa, unflinching in the face of all the rage of the Sri Lankans, is looking to finish his term. The rest of the world watches with bated breath, wondering if the same could happen to them.
The Philippines, for one, is already experiencing soaring fuel prices. The COVID-19 pandemic is still ongoing, albeit somewhat tapered by global vaccination efforts. The conflict between Russia and Ukraine also continues, affecting wheat and fuel supply worldwide. Some experts believe that other developing countries may be heading down the same dark path as Sri Lanka. But it’s worth noting that their downfall was mostly due to government incompetence.
Former consultant on Sri Lanka for the ADB and University of Sussex Professor Mick Moore commented that while the ongoing global issues do have an effect on the country, their struggle is not predominantly caused by them. “This is the most man-made and voluntary economic crisis of which I know,” Moore said on the BBC’s Today.
Sri Lanka is in a precarious situation, but maybe it isn’t too late. Rajapaksa appointed career politician Ranil Wickremesinghe as the new prime minister following his brother’s resignation. Wickremesinghe warned however, when he spoke with the BBC, that their country’s situation is “going to get worse before it gets better.” For now, the 22 million Sri Lankans could only hope the situation clears up very soon.