The paralyzing crisis has sparked massive civil unrest in the country, forcing the Sri Lankan government to impose a nationwide curfew from Saturday evening to Monday morning. This is in addition to the state of emergency declared by President Gotabaya. Rajapaksa,
But how did the South Asian nation get here and why are people so angry with the Rajapaksa family? Here’s what you need to know…
‘Twin deficit economy’
Critics say the roots of the crisis lie in economic mismanagement by successive governments, which created and maintained a double deficit – a current account deficit plus a budget deficit.
“Sri Lanka is a classic twin deficit economy,” said the 2019 Asian Development Bank Working Paper. “Twin deficits indicate that a country’s national expenditure exceeds its national income, and that the production of tradable goods and services is insufficient.”
But the current crisis was exacerbated by deep tax cuts by Rajapaksa during the 2019 election campaign, implemented months before the Covid-19 pandemic wiped out parts of Sri Lanka’s economy. .
With the country’s lucrative tourism industry and foreign worker remittances hit by the pandemic, credit rating agencies moved to downgrade Sri Lanka and effectively shut it out of international capital markets.
The travel sector, in particular, has been badly hit: so far this year nearly 30% of visitors were from Russia, Ukraine, Poland and Belarus, while Russia is also one of the biggest buyers of Sri Lankan tea, its main merchandise export.
In turn, Sri Lanka’s debt management programme, which relied on access to those markets, was derailed and foreign exchange reserves fell by nearly 70% in two years.
The Rajapaksa government’s decision to ban all chemical fertilizers in 2021, a move that was later reversed, also hit the country’s agriculture sector and led to a decline in the vital rice crop.
rising debt
As of February, the country had only $2.31 billion left in its reserves, but faced debt repayments of nearly $4 billion in 2022, including a $1 billion international sovereign bond (ISB) maturing in July .
Many in Sri Lanka fear that the country will default on its foreign loans.
ISBs make up the largest portion of Sri Lanka’s external debt at $12.55 billion, with the Asian Development Bank, Japan and China among other major lenders.
In a review of the country’s economy released last month, the IMF said 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 the findings of the IMF report and the government’s recent measures were insufficient to restore debt stability, strongly indicating “the need for debt restructuring”.
shove outside help
The crisis in Sri Lanka has been exacerbated by the Rajapaksa administration’s resistance to foreign aid.
The country is on the verge of default as it has so far relied on help from two of its major backers – India and China – and refused extensive international aid.
For months, Rajapaksa’s administration and the Central Bank of Sri Lanka (CBSL) resisted calls from experts and opposition leaders to seek help from the IMF despite mounting risks.
But after oil prices soared in the wake of Russia’s invasion of Ukraine in late February, the government eventually devised a plan to approach the IMF in April.
An IMF spokesman said on Thursday that the IMF would begin discussions with Sri Lankan officials on a possible loan program in the “coming days”.
dynasty politics
As Sri Lanka grapples with a severe economic crisis, it is difficult to overestimate the influence of the Rajapaksa clan in all this.
Gotabaya, who won the post 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 President. At the time, Gotabaya was the Defense Secretary and was notorious for his role in the 2009 operation to end the civil war with the Tamil rebels.
Rajapaksa was briefly out of power from 2015, when Maithripala Sirisena and Ranil Wickremesinghe led the country, until Wickremesinghe was removed from his post in 2018, sparking a constitutional crisis.
Rajapaksa’s party won a landslide victory in the August 2020 general election, and quickly restored broad executive powers to the presidency, which had previously been curtailed.
Another brother, Tulsi, was appointed finance minister in July 2021. He was already a controversial figure because of his American-Sri Lankan nationality – his entry into parliament was possible only when the government removed a constitutional provision barring dual citizens.
Other family members also hold key positions in the cabinet.
But not all Rajapaksa in power could do what it took to get Sri Lanka out of this crisis.
(Reuters, with inputs from Bloomberg)