Sri Lanka’s economic crisis, explained

After a month of intense civilian-led protests over Sri Lanka’s deteriorating economy, President Gotabaya Rajapaksa agreed on Friday to appoint a new council to lead the formation of an interim government. The resolution would form an all-party coalition in parliament and remove the Rajapaksa dynasty, which is currently ruling the country. The issue is the economic future of the country, which has been in turmoil for the first time since gaining independence from the British in 1948, after failing to pay প 50 billion in foreign debt.

In the last two years of the Kovid-19 epidemic, the signs of Sri Lanka’s impending economic crisis have become increasingly clear as food prices have risen and electricity blackouts have increased in frequency. Sri Lanka’s total debt this year is about $ 7 billion.

Many have blamed Sri Lanka’s economic crisis on the government’s continued increase in foreign debt and mismanagement of its finances through continued investment in infrastructure. The Rajapaksa administration has also implemented a well-planned tax cut in 2019, lowering the value-added tax (VAT) rate – the tax levied on imports and domestic supplies – from 15 percent to eight percent, which has contributed to the country’s revenue decline.

Mahinda Rajapaksa, the president’s elder brother, is expected to be removed from the PM’s post as part of a deal brokered by former president Maithripala Sirisena, who resigned in April along with dozens of members of the current president’s governing party to protest Rajapaksa’s poverty. Governing

But the country’s power struggle could sow discord between the two brothers, which could exacerbate its political stalemate. On Friday, the Associated Press reported that a spokesman for the prime minister did not immediately confirm the removal of the big Rajapaksa, saying the prime minister would announce such a decision in due course.

Without adequate revenue, the country continues to grow its external debt

A big part of Sri Lanka’s economic woes is its ballooning foreign debt, financing its aggressive twist on infrastructure development under former President Mahinda Rajapaksa, the elder Rajapaksa’s siblings and a two-time prime minister. Already due to the bloodshed, Sri Lanka has borrowed heavily from state-owned Chinese banks to finance its infrastructure projects, including the development of a controversial port in the Hambantota district.

The Sri Lankan government has justified the Hambantota project as a way to grow its economy as a busier trading center than Singapore. However, the project stalled and stalled due to corruption, and Sri Lanka was unable to repay its debt, eventually handing over control of the port to China as collateral.

According to the BBC, over the past decade, Sri Lanka has accumulated 5 billion in debt to China alone, making up a large portion of its total foreign debt. Sri Lanka’s inflationary debt to China and the failure of the Hambantota project are often cited as examples of “debt book diplomacy” that China has pursued over the past few decades.

Some believe that China, through its ambitious Belt and Road Initiative (BRI), has expanded its vision of monetary diplomacy, a global infrastructure project involving Chinese investment in infrastructure development in Asia, Africa and parts of Europe that is later repaid. As. Growing global influence as a growing economic power. Out of 147 countries in the world, including Sri Lanka, 139 have signed BRI projects with China. While an infrastructure project on such a global scale could provide some economic benefits to participating countries, BRI has inevitably become a strategic way for China to gain political advantage with economically weaker countries in the Asia-Pacific region. According to an independent analysis by the Kennedy School of Harvard at the US State Department, at least 16 countries involved in the BRI project are saddled with billions of dollars in debt that China has since recovered.

According to CNBC, about 22 percent of Sri Lanka’s debt goes to bilateral lenders – institutional investors of foreign governments. Neighboring India has sought to increase bilateral cooperation with Sri Lanka, in part in an effort to secure its influence in China over South Asia. India recently gave Sri Lanka a 1.5 1.5 billion credit line to cover the country’s energy crisis with another 4 2.4 billion through a currency swap and loan deferral from January.

As the country has accumulated foreign debt, its tourism sector – formerly a $ 44 billion industry and a primary source of revenue for the island – has been hit hard. In 2019, the church was hit by a bomb blast that killed at least 300 people, including some foreigners.

The following year, the Covid-19 epidemic halted tourism and other major sectors, fueling the global economic downturn. Although Sri Lanka saw a slight increase in the number of its foreign visitors last year, the ongoing epidemic has coincided with Russia’s aggression in Ukraine – both countries have slowed the recovery of industry – the main source of Sri Lankan tourism before the conflict.

A growing crisis sparked mass protests

The country’s problems escalated in March when the Sri Lankan government announced a 13-hour daily power cut as a way to save energy amid the ongoing crisis. Without adequate energy, the economic crisis continued and many were unable to do their job, causing widespread unrest. Thousands of Sri Lankans took to the streets in the weeks leading up to the power outage in protest of the country’s growing crisis.

On April 1, President Rajapaksa declared a state of emergency in the wake of growing unrest The protesters saw the clash with the police. Shortly after the state of emergency was enacted, the cabinet of the entire Sri Lankan government resigned in protest, prompting Rajapaksa to withdraw the law. Among those who resigned were Sports Minister Namal Rajapaksa, another member of the Rajapaksa family and nephew of the president.

In the face of growing political instability and the prospect of a solution, Rajapaksa’s opponents began calling for a no-confidence vote against his administration.

Opposition lawmaker Hersha de Silva told CNBC: “We are confident we have the numbers and we will make the proposal at the appropriate time. Hoping to calm the critics, President Rajapaksa tried to form a new unity alliance under his leadership but failed to gain support. In April, the government also announced that it would temporarily suspend the repayment of foreign loans, the first time Sri Lanka has defaulted on a foreign loan since its independence.

Experts warned for some time about a potentially dire situation around the country’s finances. When the country went into default, the government was discussing a bailout plan with the International Monetary Fund, which assessed its accumulated debt as sustainable.

The finance ministry said in a statement: “The government intends to engage with the IMF as soon as possible to formulate and present to the country’s creditors a comprehensive plan for the restoration of Sri Lanka’s external debt. .

A week later, in a meeting with cabinet officials, President Rajapaksa acknowledged his government’s role in the country’s deteriorating economy. In particular, the president said the government should have approached the IMF earlier to help it deal with its irregular foreign debt and avoid a ban on imported chemical fertilizers that were intended to protect Sri Lanka’s foreign exchange acquisition but instead hurt its agricultural production.

“The last two and a half years have been a huge challenge for us. The Kovid-19 epidemic, as well as the burden of debt and something wrong on our part, ”said Rajapaksa.

Now, Sri Lanka’s future depends on whether the president’s proposed government change will last long enough to resolve its growing opposition to the IMF. Sri Lanka’s finance minister, Nandalal Warasinghe, said such an expected deal could still be months away.