COVER STORY: Sri Lanka: The siege within …..Print edition : May 06, 2022……. [noting that the Editor was not able tomatch PHOTO and its subheading in some places]
People, cutting across communities, are paying the price for the rulers’ misplaced policies and priorities. As the ruling Rajapaksas refuse to accede to the popular demand for their resignation, the island nation is on the verge of implosion.
Protest outside the President’s office in Colombo on April 15. The anger and resentment against the Rajapaksas rise from a deep economic crisis, which was fuelled by misplaced priorities and mismanagement. Photo: JEWEL SAMAD/AFP
Daily protests across the country have been a defining feature of Sri Lanka for over a month as prices of essential commodities rise with each passing day, queues at fuel stations grow longer and longer, and planned power cuts become the only predictable part of daily life. Photo: ISHARA S. KODIKARA/AFP
On the night of Avurudu, the Sinhalese New Year, which falls on April 14, people poured out onto the streets of Colombo, the Sri Lankan capital, in a celebration of sorts. “Gota Go home,” they chanted in English, along with its Tamil and Sinhala versions—the three languages spoken in the island-nation. They all wanted President Gotabaya Rajapaksa to resign. This was the largest protest in the heart of Colombo in the past few decades.
Usually, Colombo empties out during the weeks of Avurudu and Vesak Poya (in May), and people travel to their home towns or go on holidays. This time around, the people in the capital city, home to nearly a fourth of the country’s population, seem to have decided that there were far more important things to do in Colombo than to celebrate the new year.
“I have genuinely not ever walked through crowds like this,” journalist Roel Raymond, who has filed a Fundamental Rights petition against the imposition of Emergency on April 1, noted on Twitter on April 14. “This is a massive demonstration against President Gotabaya Rajapaksa, the Rajapaksas, and the current political system. Calls for justice and to return stolen money abound.”
Daily protests across the country have been a defining feature of Sri Lanka for over a month as prices of essential commodities rise with each passing day, queues at fuel stations grow longer and longer, and planned power cuts become the only predictable part of daily life. People’s misery has to be seen to be believed. The anger and resentment against the Rajapaksas rise from this deep economic crisis, which was fuelled by misplaced priorities and mismanagement.
People took to social media to tell their problems live even as an embattled government looked for scapegoats and excuses. “I waited for two hours in the queue to find out that they didn’t have enough fuel to continue pumping,” a frustrated Sri Lankan posted on social media along with a video of a fuel station in Colombo. “Thank you Gotabaya and on behalf of all Sri Lankans, take the message and #GoHomeGota,” he added.
Thousands of people across the country echo the slogan—of asking the President to step down (‘Island in Dire Straits’, Frontline, April 22, 2022).
On April 14, a police officer joined the protesters and appealed to his colleagues not to carry out the orders of those in power. This was the second time a police officer had joined the protest in recent times. One protester told this correspondent that this officer’s speech, in Sinhala, was powerful, and that he did not mince words on who had to be blamed for the crisis. Videos of his speech went viral on social media. He was later picked up by the notorious Special Investigation Unit of the Sri Lankan Military Police.
In another incident on the same day, people surrounded the house of Shantha Bandara, a Member of Parliament who was sworn in recently as a State Minister, and demanded that he come out and explain what he would do for the people. The police soon converged on the spot and cordoned off the house.
The Rajapaksas hang on
Even as the country slips into a governance limbo, the ruling Rajapaksas are in no mood to give in to the political solution the people of Sri Lanka are looking for—resignation of both President Gotabaya Rajapaksa and his brother, Prime Minister Mahinda Rajapaksa.
Mahinda Rajapaksa, on April 13, made a desperate attempt to reach out to the protesters via Twitter, after backchannel attempts to invite them for a discussion failed. The protesters have set up temporary camps in Colombo’s prestigious Galle Face waterfront, across the Presidential Secretariat.
He tweeted: “I’m willing & prepared to meet with citizens currently engaged in the protests at Galle Face to hear their thoughts & complaints. Understanding that this is a tough time for all of us, I invite them to meet & discuss any possible, plausible courses of action for the sake of #lka [Sri Lanka].”
Also read: Roots of Sri Lanka’s economic crisis
The nearly 2,000 responses on his timeline (as on April 14 evening) included abuse. The general theme was that he should quit, and take his brother along. Some people responded by posting pictures of the main demands of the protesters.
Pasted across Colombo, these demands are: (a) the President and Prime Minister should resign; (b) No parliamentary positions should be given for anyone from the Rajapaksa family; and (c) the 19th Amendment should be reinstated. (The 19th Amendment sought to dilute the powers of the executive presidency. It was passed in 2015. The new government of Gotabaya repealed it. The protesters want this provision back.)
The protesters also made it clear that they would not “give up until these demands were met”. Yet again, on the occasion of the Tamil and Sinhala New Year, Mahinda Rajapaksa tweeted: “As the New Year dawns on our nation during one of the most challenging times for us as a people, let us come together as one, to work towards a better future for #Sri Lanka.”
His message had only greetings written, unusually, only in Sinhala. Language is a very sensitive issue in Sri Lanka and even transport buses clearly state the origin and destination in three languages—Sinhala, Tamil and English. The Prime Minister, clearly, is sending a message in his tweet. Many of the responses to it had hashtags such as #GoHomeRajapaksas #GotaGoHome and #GotaGoGama (literally Gota, Go village; meaning Gotabaya, go back to your village).
Gotabaya tweeted new year’s greetings in Sinhala, telling people that the country will “overcome the current economic crisis with unity and understanding”. Journalist Munza Mushtaq, among many others, responded in the same language, which, roughly translated, would mean: “Prosperity comes to Sri Lanka when you go home. When you go, take the whole family.”
Even earlier, on April 11, Mahinda Rajapaksa tried to assuage the agitating people through an address to the nation that the government would get its act together quickly. He said that the government was working tirelessly to address the problems, and asked people to be patient. The response from the people was filled with ridicule and derision.
Even as it appears increasingly to be a people versus Rajapaksa struggle, the news website The Leader published an article in Sinhala quoting government sources that Mahinda Rajapaksa’s son and former Minister, Namal Rajapaksa, is likely to be appointed Prime Minister, taking advantage of the opportunity presented by the protests, which are largely led by the youth. This speculation comes at a time when Gotabaya is considering forming a new Cabinet in the near future.
Journalist Saroj Pathirana discounted this theory. “Namal has even declined to join the new Cabinet of Ministers, let alone becoming new Prime Minister, sources from the Prime Minister’s office tell me,” he noted.
Like the protesters, the government too is using the same medium, but only to divide them. Sanjana Hattotuwa, who does research on disinformation, posted on his Twitter handle on April 13: “100s of pro-GR [Gotabaya] or pro-MR [Mahinda] FB [Facebook] pages producing posts like this [he added pictures], instigating hate, unrest & corrupting protest narrative. #GoHomeGota protests framed & dismissed as a project by TNA [Tamil National Alliance], NPP [ National People’s Power, a coalition of political parties in Sri Lanka] or JVP [Janatha Vimukthi Peramuna]. Gotabaya is still projected as saviour. Rajapaksas doing what Rajapaksas do.”
Bankruptcy & debt default
On April 12, Sri Lanka finally took the most difficult financial decision in recent times: to stop all international debt payments until the country’s economy improved. A release from the Ministry of Finance said: “It shall therefore be the policy of the Sri Lankan government to suspend normal debt servicing…for an interim period pending an orderly and consensual restructuring of those obligations in a manner consistent with an economic adjustment program[me] supported by the IMF [International Monetary Fund].”
Sri Lanka’s total foreign debt is $51 billion. The release further stated: “The government is taking the emergency measures … only as a last resort in order to prevent further deterioration of the Republic’s financial position and to ensure fair and equitable treatment for all creditors…in the comprehensive debt restructuring that now seems inescapable. The government has taken extraordinary steps in an effort to avoid a resort to these measures, but it is now apparent that any further delay risks inflicting permanent damage on Sri Lanka’s economy and causing potentially irreversible prejudice to the holders of the country’s external public debts.”
Also read: Why Sri Lanka defaulted on its foreign debt
Sri Lanka’s Daily FT headline on page one screamed the next morning: ‘Sri Lanka declares bankruptcy.’ This is the first time since Sri Lanka became independent that the country had defaulted on its external debt service obligations. Market borrowings form the largest pile of the debt (47 per cent). All ratings agencies have downgraded Sri Lanka. “This wasn’t unexpected as we knew home-grown [solutions] of Ajith Nivard [former Central Bank of Sri Lanka Governor] wouldn’t work,” said W.A. Wijewardena, former Central Bank Deputy Governor.
What infuriates people is that all this was foretold. On April 12, Deshal de Mel, an economist, shared on Twitter an internal government note from December 4, 2019. It said: “It is evident that the recent tax revisions will have a significant threat to Sri Lanka’s medium term debt sustainability…. If Sri Lanka loses access to global bond markets due to an unsustainable fiscal position, there is an increased likelihood of default on external debt for the first time in post-independence history.”
This note turned out to be prophetic. It added: “Even without a default, in the medium term these tax reductions will generate pressure for higher domestic interest rates, weaker currency, and higher inflation.” The tax reduction referred to here is what Gotabaya gave Sri Lanka soon after he was elected President in 2019. The tax cuts were a popular measure, and Gotabaya’s party, the Sri Lanka Podujana Peramuna (SLPP), won a landslide victory in the ensuing parliamentary elections. Ordinary Sri Lankan citizens are now paying the price for this largesse, which was accentuated by the COVID pandemic and declining foreign remittances.
Meanwhile, SriLankan Airlines placed an advertisement on its website for the lease of 40 aircraft. An aghast Harsha de Silva, a Colombo MP, said: “Sri Lanka is bankrupt … where the hell is money for this nonsense?”
SriLankan Airlines clarified that all aircraft operated by the airline are leased and that the leases were expiring over the next few years. It said: “Replacement leases can be taken at significantly more favourable market rates…. This exercise is targeting an overall reduction in the airlines cost structure, continuing to the cost restructuring carried out successfully over the last two years. The number of aircraft sought to be replaced over several years is 21 and not 42 as incorrectly reported.”
After the clarification, Harsha pointed out that “this is certainly not priority during Sri Lanka’s economic crisis. People need fuel, gas, cancer drugs, milk powder; not aircraft.”
Charitha Herath, MP, joined Harsha in expressing his deep shock over the advertisement: “True. It is an utter joke to publish such a notice by a state-owned enterprise which is already making huge losses.”
That is not all. In the middle of the worst economic crisis, Sri Lanka’s Lankadeepa newspaper revealed that actor Bandu Samarasinghe, who supported Gotabaya Rajapaksa in the last election and who was not “accommodated” in a suitable post, was made Consul General in Milan, Italy. “So far no official announcement has been made over the new appointment,” the website Newswire reported. The government later clarified that his name was proposed but no decision had been taken yet.
The protesters are wary of the opposition political parties too. Just a few years ago, the United National Party (UNP) and the Sri Lanka Freedom Party (SLFP) shared power, and it was their bickering and lack of governance that propelled the Rajapaksas to power, via a newly founded political party, the SLPP.
The UNP has since split, and its leader, former Prime Minister Ranil Wickremesimnghe, who holds the reins of a weakened party, has been seen as talking sense in parliament and outside. Many protesters, however, do not want him either as he is also seen as part of the problem.
Although Sri Lanka’s tentative opposition political parties have shed their lethargy and come out to protest in parliament and outside in the recent past, there is a clear divide between the political parties and the protesters. Regardless of this, the left-leaning JVP and the opposition combine, the Samagi Jana Balawegaya (SJB), are working to unseat the government. On April 14, the JVP announced that it would hold a public meeting and protest march again through April 17-19 in support of the public demand that the President and Prime Minister must resign.
On April 13, Sajith Premadasa, the Leader of the Opposition, said that he had signed an impeachment motion against the President and a no-confidence motion against the government. Sajith Premadasa, son of former President R. Premadasa, who was assassinated on May 1, 1993, is best placed to challenge the government in parliament but had not talked about moves such as a non-confidence motion or impeachment until now, even though signatures were being collected for the motions in March. “Without change, we will not stop,” he tweeted. “SJB signing No Confidence Motion and Impeachment Motion. Constitutional Amendment to abolish Executive Presidency & Repeal 20th Amendment on the way.”
One feature of the agitation is that all communities that have a stake in Sri Lanka are part of it—Sinhalese, Tamil and Muslim. Muslims have been seen praying at the Galle Face protest site, and Tamils and Sinhalese have been seen respecting the sentiment of Muslims. In fact, one of most widely shared WhatsApp message on April 13 was this: “From tomorrow onwards, 14.04.2022, let’s call it the ‘Sri Lankan New Year’ and not Sinhala and Tamil new year as we are all Sri Lankans.”
C.V.K. Sivagnanam, deputy general secretary of the Ilankai Tamil Arasu Katchi (ITAK), said on April 9 that “Sinhala youngsters carrying placards questioning the fate of Tamils taken away by Gota’s army in 2009 is strong dawn of realization & understanding grievances of Tamils. It would augur well for both communities & the country if that leads to political solution.”
Turning to India, China
Even as the stalemate continues, Sri Lanka took the first steps to avert further deterioration of conditions, with top representatives from the government approaching both India and China for help. Meanwhile, the government continued negotiations with the IMF to figure a way out.
India had already agreed to provide $1.9 billion in loans, currency swaps and credit lines. In addition, India was considering providing $2 billion in various forms of support. Sri Lanka wanted more, to the tune of $500 million, and help with extending the deadline to pay dues to the Asian Clearing Union.
China has provided nearly $3 billion under various arrangements. This is in addition to the $3.5 billion debt that it already owes China. The food aid and the financial packages put forth by both China and India are keeping Sri Lanka afloat for now. Hence, Sri Lanka has a narrow time limit to finalise its arrangements with the IMF, because once the aid runs out, Sri Lanka’s food shelves will run dry.
The protesters are not pleased with these developments. “The aid will mean that the Rajapaksas control distribution, and this will help them remain in power,” one IT professional told this correspondent. “India should have distributed the aid to us with the help of international relief organisations. The government will not to do it properly.”
Also read: ‘They kept denying that there was a crisis’
A few Tamils who lived through the 1983 anti-Tamil riots in Sri Lanka were of the opinion that India was making the wrong move again. “Helping the Sri Lankan government now is equivalent to working against the will of the people. Doesn’t India see that Sri Lankans across the world are protesting? India is helping the Rajapaksas now,” a representative of the group, who did not want to be named, said. A Sinhalese professional shared his sentiment. “This government is the reason for our problems. Why is India helping them and not the people?” he asked.
China too was told in no uncertain terms what the sentiment of the protesters is. A massive signage ‘Gota Go Home’ was fixed across the fencing of the Port City, the multi-billion dollar Chinese tax-free island project in Galle Face.
The competitive assistance provided by India and China is not enough for Sri Lanka to tide over the political and economic crisis that has engulfed the country. Economists are of the opinion that regardless of who is in power, the pain following a restructuring will be felt by most Sri Lankans for a long time. Herein is the problem: do people have the patience to put up a few years of hardship before the economy turns around? According to a few responses from the ground, it appears unlikely.
The political turnaround will be more tricky. An intelligence official expressed concern that there could be some “melodrama” involving someone in high office, such as an attempt on his life. This will apparently happen a few weeks after the country appears to head towards stability. This staged event might be used as an opportunity to turn one community against the other. Right now, the Sinhalese, Tamils and Muslims have come together to protest. But if a clever game is played, the majority community, the Sinhalese, could be “won over”, by portraying one of the two minority communities as villains.
Either way, in the end, people have to pay the price for the economic profligacy of those it selected to rule. The question is, how big will be the price.
A Buddhist monk and member of the Socialist Youth Union tangles with a police officer and sends his cap flying at a protest outside the President’s secretariat against the economic crisis, in Colombo on March 18. Photo: Dinuka Liyanawatte/REUTERS
President Gotabaya Rajapaksa delivering a speech in the Parliament on August 20, 2020. Photo: ERANGA JAYAWARDENA/AP
Namal Rajapaksa, son of Mahinda Rajapaksa, in Colombo on December 14, 2018. Photo: LAKRUWAN WANNIARACHCHI/AFP
Waiting to buy LPG cylinders in Rathgama in Galle district, on March 27. Photo: ISHARA S. KODIKARA/AFP
At a fish market in Colombo on March 24. Fish prices have shot up as a fuel shortage is stopping fishermen from going to sea or transporting their catch. Photo: ISHARA S. KODIKARA/AFP
In queue to buy diesel at a Ceylon Petroleum Corporation fuel station, in Colombo on March 31. Photo: ISHARA S. KODIKARA/AFP
A view of the Lotus Tower in Colombo on September 16, 2019. The tower is one of several Chinese-built projects in Sri Lanka. Photo: ISHARA S. KODIKARA/AFP
A massive protest in front of the President’s secretariat against the worsening economic crisis, in Colombo on March 15. Photo: DINUKA LIYANAWATTE/REUTERS
Sri Lanka’s ongoing economic and humanitarian catastrophe becomes a full-blown political crisis, with the people taking to the streets in protest and a defiant government announcing an islandwide emergency in reprisal. Public anger against the Rajapaksas has turned the clan into enemy number one.
A sickeningly familiar story that has played out in country after ill-administered country, of government incompetence leading to citizen unrest and violence, in turn leading to more repressive measures, is now playing out in Sri Lanka. History has been witness to the endgame too in such cases: the people do not vanish as the story winds down, the rulers do.
The Sri Lankan debacle begins with sudden import restrictions imposed about six months ago. The reason was that the government woke up quite late to the developing foreign exchange crisis and acted in a knee-jerk manner that created fear among the people and distrust of the government in the market.
The situation quickly spiralled into a crisis marked by power cuts, scarcity of fuel and other essentials and rising public anger. The people vented their anger in online public fora and later in the streets, inviting swift and brutal reprisal from the government. At the time of filing this report, protests were swelling and President Gotabaya Rajapaksa had responded with yet another draconian step: the imposition of a state of emergency in the country with effect from April 1 ahead of island-wide protests planned for the week.
A gazette issued by the government said the President was taking the step “in the interests of public security, the protection of public order and maintenance of supplies and services essential to the life of the community”.
The problem began with the ruling Sri Lanka Podujana Peramuna-led (SLPP) government taking its eyes off the economy and letting trusted but incompetent lieutenants of the Rajapaksa clan manage it. Nalaka Godahewa, Minister for Urban Development, who drew up a vision document for the SLPP ahead of the parliamentary elections in 2020, admitted on a local television show that because the government gave tax concessions (to the rich), revenue collections had come down significantly, by about 2 per cent of the gross domestic product (GDP). However, there was no significant reduction in government spending.
Also read: Sri Lanka on brink of ruin
In fact, government spending went up massively on account of the COVID-19 pandemic. Already, with revenue collections down and foreign exchange earnings dwindling, economists and nearly everyone who had followed developments in Sri Lanka were aware that the country was heading for an economic meltdown. Somehow, the government did not pay enough attention, except for replacing one incompetent person with another in a critical seat of power and enormous responsibility.
Shortage of essentials
Sri Lanka imports most of its fuel requirements, apart from many other essential items. With foreign exchange reserves declining, the government was unable to import sufficient quantities in time and keep them ready for disruption-free distribution.
At the heart of the Lankan fiasco is the shortage of two essential fuel items, liquefied petroleum gas or LPG and diesel, and the daily day-long power cuts as a result of the shortage of fuel needed to generate electricity. From March 31, the Ceylon Electricity Board (CEB) announced a 13-hour daily power cut. The same day, the CEB chairman, a political appointee, declared: “When God gives rain and CPC [Ceylon Petroleum Corporation] gives fuel, CEB can give power.”
The shortages affect people in every possible activity. A lack of fuel means inability to get to a place of work; companies cannot function in the absence of power; mobile phone service is patchy because towers suffer from power cuts; and the LPG shortage means an inability to cook meals at home in the most populous and job-intensive Western Province, where the capital Colombo is located.
No trust in government
The shortages and the government’s mishandling of the crisis have meant that there is no public trust in the government. Hence, many people have flocked to supermarkets to pick up as much stuff as possible, forcing supermarkets to clamp down on bulk purchases and apply some sort of informal rationing.
A Colombo resident told Frontline that there was no point in buying perishable stuff in bulk any longer, even if it was available, because of the power cuts. She asked: “How and where will you store anything when there is a 13-hour power cut every day?” She also said that it was not prudent either to cook every day if one lived in an apartment because of the gas shortage. In short, you cannot cook in bulk because you cannot stock it in a refrigerator; and you cannot cook every day because you use up too much LPG. “What do I do?” she asked.
Also read: Which way Sri Lanka?
That is not all. Bank ATMs do not function for a large part of the day because of the massive power outages. A customer at an ATM on the outskirts of Colombo said: “You can’t keep too much money at home out of fear; and now, you can’t get money out when you need because the ATMs don’t function.”
Impact on small business
Small businesses are the worst hit as a result of the blackouts. Bread-based snacks are the most popular short eats in the island. But in many places, the lack of power has meant that it is not possible to heat the snack before it is served to a customer. While the big outlets somehow manage to access diesel and run their operations, at a scaled-back level, small businesses do not have the luxury of sending someone on a mission across the island to obtain diesel and a generator to keep the business running.
But big businesses are also complaining. An employee of a construction major, describing how his work was getting affected, said: “Our company moved the material that arrived from abroad to a warehouse a few days ago because if it stays in the port we have to pay too much money. Now, we are unable to find diesel to move the material from the warehouse to the construction site.”
Another person from the poultry industry said a major chicken farm was forced to cull its entire batch because freezer trucks were not available. He said: “Once the chicken is mature, there is no point keeping on feeding it. This is a loss to the farm. Diesel shortage and power outages mean limited availability of freezer capacity. What else does a farm do?” He added that culling and scaling back of operations were the only options left. One farm did this and chicken prices have more than doubled in the past month.
On March 30 and 31, fishermen in many parts of the island stopped venturing out to sea. A fisherman told Frontline over phone from Jaffna: “My uncle and two of his friends went out at 4:30 a.m. looking for kerosene. By 2 p.m. they gave up. There is no kerosene [used in smaller boat engines] or diesel anywhere to be found.” The same sentiment was echoed in Galle, which is over 400 kilometres from Jaffna. Anecdotal evidence from the stretch from Colombo to Unawatuna, a 122-km coastal road that this correspondent travelled, revealed that trying to locate kerosene or diesel was a daily chore taking up most of the day for many people.
Even if they do manage to obtain kerosene or diesel and venture out to sea, there is another problem: most of the catch has to be sent to Western Province, but with diesel hard to find, it is impossible to access refrigerated trucks that can make the journey. On April 1, most of the fishermen in the north had halted operations because they ended up spending more money trying to get kerosense and diesel than they made from selling their catch locally.
Also read: All at sea
This has resulted in a steep rise in fish prices. Fish is a cheap source of protein for the majority of the population. The cheapest fish variety is typically what is left out after sorting a catch. This mixture of fish is sold cheap, for about 100 Sri Lankan rupees. The price of this mixture has tripled already, and one fisherman said that if the current trend holds, the price will go up further, forcing the poor to opt out of this source of nutrition.
Fishermen in Rajapaksa’s hometown Hambantota have been protesting every day for the past few days. Others along the southern coast, in Galle, Ambalantota and elsewhere have been joining the rising tide of protest every day.
Namal gets trolled
Putting up a brave face, Namal Rajapaksa, heir apparent to the throne and one of six Rajapaksas who are Ministers, said on Twitter on March 30: “Firstly I want to state that I apologise for all inconveniences the people have had to endure. These are difficult times but I believe we will overcome them…”
He was trolled mercilessly. Sachi, a graphic novelist, asked: “Inconveniences? Four people have died in queues so far and the Government doesn’t even have the spine to acknowledge. I dare you to visit a fuel queue on your own.” Andrew Fidel Fernando, an author, said: “Hi, nice to see everyone. Let’s all meet up again in the replies on Namal’s next tweet.”
Abhinesh, a Sri Lankan citizen, asked: “First, is there any power cut at your home?” Namal responded: “Yes.” Immediately, many on Twitter descended on him asking if the news put out by Newswire, stating that the President’s house, Parliament and the housing scheme for members of Parliament were exempted from power cuts. Namal responded: “I don’t know about others, but I know that I have been experiencing the power cuts in my residence.” He was again trolled massively. An academic asked him if he was doing something about it or if he too had given up on the government. Lakshman Daniel, a priest, asked: “After so much of lying all these months, you guys expect us to still keep believing your words? Must be joking.”
The growing frustration over the inability to make ends meet has driven many people to take to the streets. For instance, on April 1, the day Gotabaya Rajapaksa proclaimed a state of emergency (late in the night), there were at least six protests in and around Colombo alone: at Reid Avenue, VMD Park, Negambo, Bandaragama, Nugegoda, and Kohuwela junction.
But the protest that sparked multiple such events across the island happened in Colombo’s Mirihana suburb, near the President’s residence, on March 31. Mirihana, an upper middle-class area, has also been experiencing massive power cuts. According to eyewitness accounts, every day a handful of residents would stand in front of the road leading to the President’s house to mark their displeasure.
On March 31, this protest was posted across multiple social media accounts and the crowd swelled in about an hour. By around 8 p.m. a massive crowd of at least 5,000 people had gathered on the road. The police initially tried to pacify the crowd but later began pushing them back as the crowd surged and repeatedly chanted slogans asking the President to resign.
The police action, which was telecast live on a few ‘daring’ news channels, attracted more people to the venue. By 8:30 pm, the police and members from other security branches sealed off all roads leading to the venue. The protesters stayed put, even as the police asked them to disperse.
As is the norm in Sri Lanka, riot police, water cannons and armoured vehicles were all deployed by the government in a show of brute power. In the melee, it appears that some miscreants set fire to a police vehicle, giving the police the excuse it needed to attack innocent civilians. Namini Wijedasa, a notable journalist, said in a widely shared Facebook post: “People were angry. Incandescent. They railed, first against Gotabaya Rajapaksa and, second, against the Rajapaksa clan. It was unlike any other protest I had seen in recent times because it was ‘ordinary, middle-class folk’. They were friends. They were young, educated, white-collar workers….people who thought that real problems, where you couldn’t afford to eat or had no means to earn a living, happened to others.”
Obviously, the government pushback was vicious. More than 50 protesters were arrested and charged. (When they were brought to the court for remand, more than 300 lawyers received them, clapping and raising slogans in their favour. Not one lawyer left the court room until all the cases were heard. The lawyer fraternity, though not officially, has decided to defend all of them pro bono).
Also read: One law, many problems
A release from the President’s media division on April 1 claimed that the protest was an extremist conspiracy. It said: “It has been revealed that a group of organised extremists who were among the protesters near the Jubilee Post in Nugegoda had started a riot and created a violent situation. This group, carrying iron bars, clubs and sticks, had provoked the protesters and marched towards the President’s residence in Pangiriwatta in Mirihana, causing a riot. Many of those involved in this violent incident have been arrested and many have been identified as organised extremists.”
It added: “They had led the protest shouting the slogans ‘let’s create an Arab Spring in this country’. Detainees have revealed that the riot was carried out using social media anonymously to provoke people in order to destablise the country.”
The government’s spokespersons who were defending the government that day, including Keheliya Rambukwella, Health Minister, could not answer the media, which for once was asking searching questions about the protests. This was because most of the mediapersons at the press conference had been at the protest site too, and the government’s fiction in the press release did not cut much ice with them. For once, almost in unison, they reflected the mood of the people, and asked what the government was doing to mitigate the sufferings of the people.
The Rajapaksa clan
To keep public anger simmering, there needs to be a focus, an enemy, so that the discontent can be sustained to a level where the ruler can be deposed. In this case, the anger has a focus: the Rajapaksa family. For the first time in the history of independent Sri Lanka, it is not a minority community like the Tamils initially or the Muslims later, who are being seen as the enemy. It is a bunch of hardcore Sinhala chauvinists from Hambantota, the Sinhala heartland. The members of the Rajapaksa family, who spurned the Tamil and minority vote and who were embraced by the Sinhalese in the 2019 presidential election as their own, are now being branded as the enemies of public good. While mismanagement of state affairs is the main reason for this, the optics of seven members from a single family occupying positions of power has added fuel to the discontent.
Among them, President Gotabaya Rajapaksa was considered brash and outspoken but honest. That image is now in tatters; instead, he is now seen as yet another Rajapaksa hanging on to power. Prime Minister Mahinda Rajapaksa is the binding force of the family. He is the peacemaker and the dealmaker. He is the reason why the Rajapaksas are still in power. He has managed to garner the support of 159 MPs in the 225-member Parliament. Unless Mahinda is unseated through a defeat on a no-confidence motion on the floor of Parliament, dislodging the Rajapaksas will prove to be difficult.
Basil and Chamal are the two other Rajapaksa brothers who are in positions of power. Basil, once part of a three-member Sri Lankan team that negotiated with India during the Eelam war years (2006-09), is clueless now as Finance Minister. The quiet Chamal, who was previously Speaker of the Parliament, is the Home Minister.
Mahinda’s son Namal Rajapaksa is the Youth and Sports Minister who was seen as suave and urbane. Videos surfaced of him surfing in the Maldives last month, and public anger has been directed against him ever since.
Like Namal, other members of the family are in positions of power because they belong to Sri Lanka’s first family: Yoshitha Rajapaksa, Mahinda’s son, is his Chief of Staff; Shasheendra Rajapaksa, Chamal’s elder son, is a State Minister, while Shameendra Rajapaksa, another son of Chamal, is the Director of Sri Lankan Airlines. Besides, close relatives have been given plum posts in diplomatic missions and public sector undertakings.
The public did not have a problem with the country being run by the Rajapaksas as long as the clan delivered. But the current crisis, which has turned from an economic one to a political crisis purely because of the miscalculation of Gotabaya Rajapaksa, has thrown up the question whether this is the beginning of the end of the Rajapaksa clan’s stranglehold on state power.
Political parties of the opposition have so far not been very active in anti-government protests. There have been a few meetings by the Janatha Vimukthi Peramuna (JVP) and a protest in Parliament, but organised protests are beginning only now because the people have begun asking questions of the opposition too. On April 1, as many as 11 political parties that support the government asked the President to dissolve the current Cabinet and form a caretaker government instead.
Most people that this correspondent met across several towns in the south did not have any high hopes from the opposition too. One person wanted to know why the leaders were not interested in the people’s woes. A person waiting in a queue said: “The only politician who has visited a petrol station is the Indian [External Affairs] Minister, S. Jaishankar. Where are our Ministers and elected representatives?”
Many others joined in, expressing similar views: that all politicians are the same and that the people will only be replacing one set of incompetent people in governance with another set. There was one startling suggestion from a young man, who wanted to know if the “Indian government and all other foreign governments can send relief directly to us, instead of giving it to the government?” He added that he did not trust the “government people” to give it to the people of the country. This is the level of mistrust of the political class.
Also, a majority of those Frontline spoke to, across towns, did not believe that the Army was a responsible, non-corrupt organisation. Some of the responses were: “They are the same”; “They are supporting the government in power”; “They are running everything”; “They are part of the problem.”
Also read: Under fire
Roshan Mahanama, former captain of the Sri Lankan cricket team, was among those who weighed in on the problems on Twitter. He said: “I am writing this post with a very heavy heart as I am hurt and sad to see the state of my country which is on the brink of an economic depression, caused by our incompetent power-hungry rulers.” He added: “I must say that I love my country and I am more patriotic than most of these so-called leaders, as I did not leave the country when I got an opportunity. I request all of you to set aside religion, race, political class, beliefs and stand as one nation at this point in time…. Let us raise our voice and say ‘enough is enough’. I stand with the people of this country, joined by a common purpose to take our beautiful motherland out of these dark times and create a peaceful environment for our future generations.”
Herein also lies Sri Lanka’s problem: who or what is the alternative to those in power? An official said that this correspondent was framing the question wrong. He said: “You should first remove these people [the Rajapaksas]. Everything else comes later.”
From the actions of the President, it is very clear that he is not going anywhere; the Rajapaksas are digging in. There are reports of difference of opinion among the brothers, but Mahinda’s visit to the President the day after the Mirihana protests put to rest any speculation that there was any serious difference of opinion within the clan. The Rajapaksas control state power, they control most arms of the government, and they have established a working relationship with India and a partnership with China. As long as the police and the Army are willing to do the government’s bidding, they cannot be dislodged from power.
However, there are two riders to this: one, if the politically ambitious Army Chief and the patriotic Defence Secretary decide to go by the book and not kowtow to the Rajapaksas, there will be a sudden change in Sri Lanka. Two, if 47 of the 159 MPs supporting the ruling party decide to vote against the SLPP government, then Mahinda’s government will fall, leading to a series of changes. But both possibilities are far-fetched.
Fear of India, no anger against China
Both India and China are keenly watching the unfolding situation and have helped the country out in terms of food and financial and material aid. While Indian politicians and officials stay in the limelight in Sri Lanka, the Chinese embrace the media for specific purposes. Across the southern skyline though, from Colombo to Hambantota, most of the high-rises are Chinese-built, and many are Chinese-held. Regardless of this, it is India that gets the flak for what Sri Lankans see as acts of omission and commission on the part of the overbearing northern neighbour.
India’s historical support to Tamil militants at one point of time in the past has resulted in even the well-heeled Sinhala aristocracy’s irrational anger against the country. In a group interaction with Frontline, one person expressed fears that Indians would buy up land in Sri Lanka; another was apprehensive that India would push for taking away the Tamil-speaking northern areas using the 13th Amendment to the Sri Lankan Constitution; yet another attempted to explain the crisis by raising the question of “who benefits if Sri Lanka falls”.
Also read: Distress and divide
In their view, the Sri Lankan economic crisis, although a self-created one, was aggravated by India’s ‘games’. Nothing would flatter South Block or the Research and Analysis Wing more, since India has steadily lost clout in Sri Lankan affairs in recent times.
Another discernible response to the crisis was the lack of anger against China on the surface. Asked why, a protester in Kaluthara in the south, said: “These guys screwed it up. Why blame China or anyone else?” The Chinese presence in Sri Lanka cannot be missed: as you drive out of the airport, you have to take the Chinese-built expressway to get to the city. As you near the city, you pass an interchange, held together in one stretch with gold-coloured steel wire rope—again Chinese-built. The most imposing structure as one enters the city is the Chinese-built Lotus Tower. Across the city, the Chinese have bagged construction projects, and signs in Mandarin are a familiar sight.
More repression ahead
The imposition of the emergency gives even more powers to the government to repress people, since “the public security ordinance describes emergency as a clear situation of exceptional threat, danger or disaster, where the government can be given powers not permitted during normal times”, according to the Centre for Policy Alternatives, a Sri Lanka-based think tank. In making the proclamation, Gotabaya Rajapaksa, has forced opposition political parties to react, converting what was essentially an economic problem into a political crisis.
The Bar Association of Sri Lanka has demanded a withdrawal of the ordinance and has asked the government not to use it “to stifle peaceful protest and dissent or to make arbitrary arrests and detentions”. Several politicians too have demanded that the ordinance be rescinded.
But the government appears to be in no mood to relent. The chief weakness in its strategy is the inability to find someone to blame the economic woes on. Until the conclusion of the Eelam war in May 2009, and even for a while later, the Tamils were the Sinhala establishment’s favourite scapegoat. After the 2019 Easter bombings, a new target, Muslims, had arrived, since all the men who were part of the attack were Muslims.
This propelled the SLPP to power in 2020. The India card has been played and worn out. The government is looking for a new demon. Unfortunately, there appears to be no one in sight. As for the people, the villain is clear: it is the Rajapaksa clan. The battle between the people and the Rajapaksas has begun.
COVER STORY: SRI LANKA’S WORSENING CRISIS … Roots of Sri Lanka’s economic crisis …….RAMAKUMAR Print edition : April 22, 2022
A protest against the surge in prices and shortage of fuel and other essential commodities in Colombo on April 1. Photo: ISHARA S. KODIKARA/AFP
Sirimavo Bandaranaike. As Prime Minister she pushed for land reforms and nationalisation of industries. Photo: The Hindu Archives
J.R. Jayawardane. His government in the late 1970s went in for neoliberal reforms. Photo: The Hindu Archives
President Gotabaya Rajapaksa (right) swearing in his elder brother Mahinda Rajapaksa as Prime Minister in August 2020. The brothers are seen as largely responsible for the current crisis. While Mahinda Rajapaksa’s government turned to the IMF after the civil war, Gotabaya’s government’s experiments with organic farming have led to a signifant fall in agricultural productivity. Photo: ISHARA S. KODIKARA/AFP
Inside St. Sebastian’s Church in Colombo after a blast ripped through it in April 2019. Easter suicide bombings killed more than 250 people in Colombo that year, leading to a huge fall in international tourist arrivals. Photo: CHAMILA KARUNARATHNE/AP
The COVID-19 pandemic arrived in 2020 on the back of President Gotabaya Rajapaksa’s tax cuts and the April 2019 blasts, leading to a fall in exports of tea, rubber and garments, further reduction in tourism, and a fall in remittances as workers abroad lost jobs. Here, government employees returning to work after the lockdown in May 2020. Photo: ISHARA S. KODIKARA/AFP
Sri Lanka’s current economic crisis is rooted in its long dalliance with IMF-imposed conditionalities and has been aggravated by the Rajapakse government’s quixotic organic farming adventure. Without a course correction, more misery is in store for the country.
Sri Lanka is in the news for all the wrong reasons. Its economy has been in a crisis owing to a serious balance of payments problem. Its foreign exchange reserves are depleting rapidly. The country is unable to repay past debts. It is becoming increasingly difficult to import several essential consumption goods, such as food, fuel and fertilizers. Domestic agricultural production has fallen. Hunger and malnourishment are rising. Inflation ruled at 17.5 per cent in February 2022.
Given the manufacture of narratives in our times, a dominant explanation for the crisis in the mainstream media centres around the so-called “debt-trap” that China is accused of having set for Sri Lanka. However, China’s share in Sri Lanka’s total foreign debt was less than 10 per cent in 2020. Sri Lanka borrowed more through international sovereign bonds and from Asian Development Bank and Japan than from China. The China-centred analysis draws from a Western campaign and is essentially aimed at obscuring the central role of several domestic and international agents, especially the International Monetary Fund (IMF), in the making of the Sri Lankan crisis. A composite understanding of the roles of all these agents is necessary to understand the predicament the island economy finds itself in today.
British colonialism was instrumental in entrenching a new cropping pattern in Sri Lankan agriculture, which was aligned to demands in the European market. The British introduced tea, coffee and rubber in the uplands, where large numbers of Tamilian workers were brought in to work as indentured labourers. At the time of independence in 1948, a third of Sri Lanka’s gross domestic product (GDP) came from the exports of these primary commodities.
Such a classic lock-in of the economy as an exporter of primary commodities was difficult to wriggle out of after independence. Foreign capital continued to control the plantation sector, and much of the profits from plantations were drained out of the country. As the cropping pattern failed to diversify, Sri Lanka relied considerably on the import of essential food items like foodgrain, pulses, milk and sugar. Unsurprisingly, then, industrial capital accumulation, too, was stifled. Thus, the country was dependent on imports in non-agricultural consumer goods too. Over time, the inability of the post-war Sri Lankan economy to escape from the rigidity of this economic structure within the global capitalist milieu was to become its bane.
Until the second half of the 1950s, the Sri Lankan economy enjoyed a trade surplus owing to rising primary commodity prices. The rising tax revenue from export crops allowed Sri Lanka to invest in free education, free primary health care and a subsidised food rationing system. Because of these early investments, Sri Lanka became one of the outliers in the development literature with admirable social sector indicators even at low per capita income levels.
However, once the Korean war eased, things became difficult. As commodity prices fell, exports fell too, but imports kept rising. Sri Lanka walked into a serious balance of payments crisis by 1965-66. It was in this situation that the IMF first entered the scene with a loan tagged with its inevitable conditionalities. The country was forced to cut its budget deficit, slash subsidies, follow a tight monetary policy and reduce taxes on private and foreign capital. In the late-1960s, the currency was devalued by 20 per cent, a dual exchange rate regime was introduced and imports were liberalised.
The IMF’s reform package was partially reversed in the first half of the 1970s by the Left-leaning Sirimavo Bandaranaike government. This government pushed for land reform, nationalised industries and increased social-sector expenditures. International organisations such as the World Bank and the IMF criticised Sri Lanka for the policy shift, which led to much external hostility towards the Bandaranaike government. In 1973, the oil shock led to a major drain of foreign exchange reserves. Social expenditures had to be maintained, industrial growth was stagnant, external perception was hostile and essential consumer goods had to be imported. These conflicting features could not be reconciled by the ruling coalition, and it finally collapsed in 1977.
NEOLIBERALISM IN SRI LANKA
In 1977, a United National Party (UNP) government led by J.R. Jayawardane took office. The UNP government inaugurated the embrace of neoliberalism—the “open economy”—in Sri Lanka. Its aim was to build “a free and just society”; following Milton Friedman, free society was seen as inseparable from a free economy. Towards this goal, Jayawardane obtained three major IMF loans: for 1977-78, for 1979-1982 and for 1983-84.
As part of these loans and the attendant conditionalities, Sri Lanka consented to another economic reform programme consisting of a set of recommendations that later crystalised into the “Washington Consensus”. The programme included exchange rate liberalisation, rupee depreciation, abolition of price controls, slashing of food subsidies, restraints on wages, tight monetary policy, encouragement to private enterprises and more foreign aid.
There is much literature that details the havoc that the IMF programme wreaked between 1979 and 1983 (see G.A. Cornea, R. Jolly and F. Stewart, Adjustment with a Human Face, Clarendon Press, Oxford, 1987). Income inequality, which had fallen between 1970 and 1977, increased afterwards; the share of income of the bottom 40 per cent fell from 19.3 per cent in 1973 to 15.3 per cent in 1981-82. Real wages fell. As a share of total expenditure, social sector expenditure fell from 33 per cent in 1977 to 22 per cent in 1983. Public expenditure on health fell by 13 per cent between 1979 and 1983, as did public expenditure on food subsidy and the supplementary feeding programme. Food subsidy was substituted with food stamps, but the value of food stamps eroded rapidly with inflation.
The daily per capita calorie intake of the bottom 20 per cent of the population fell from 1,500 calories in 1978-79 to 1,370 calories in 1981-82. Malnourishment among children of age 6-60 months in rural areas rose from 6.1 per cent in 1978-79 to 9.4 per cent in 1981-82. Literacy rates among those between five and 14 years fell from 88 per cent in 1978-79 to 86 per cent in 1981-82. School avoidance rates for children in Classes 1 to 8 increased from 12.2 per cent in 1978-79 to 13.5 per cent in 1981-82.
The implementation of the IMF programme also happened in the background of two political shifts. Firstly, the government needed a diversion to shield it from the public anger over the rising economic hardships. Thus, it consciously promoted a brand of Sinhala chauvinism to create a divide between the Sinhala population and the Tamil minority. There was systematic discrimination against Tamil minorities and frequent attacks against them. Alongside, the demand for a Tamil Eelam emerged, and groups led by V. Prabhakaran ambushed and killed Sinhala soldiers. These complex political developments culminated in the July 1983 pogrom against Tamils and the start of the long civil war.
Secondly, there was also massive suppression of trade unions and Left movements that opposed neoliberalism. Authoritarianism received a boost when the parliamentary system was replaced with a presidential system. General strikes of workers were put down brutally, including through the mobilisation of defence reserves and the declaration of national emergencies. “The elephant has only shaken its trunk and not yet used its full strength,” threatened Jayawardane in one nationwide broadcast in response to a workers’ strike in August 1980. (The elephant was the UNP’s electoral symbol.)
THE POST-CIVIL WAR ERA
The long civil war that began in 1983 came to a violent end in 2009. It was expected that the economy would be set on a growth path with the onset of “peace”. However, history could not be shrugged off that easily. To kick-start the war-torn economy, the then President Mahinda Rajapaksa of the Sri Lanka Podujana Peramuna (SLPP) approached the IMF for a $2.6 billion loan in 2009. War requirements had kept fiscal deficits high, and capital flights after the global financial crisis in 2008 had drained Sri Lanka’s foreign exchange reserves. This was when the IMF loan was sought in 2009. Unsurprisingly, the IMF’s cardinal conditionality was rather straightforward: cut fiscal deficit to 5 per cent of the GDP by 2011.
There was, in fact, a spurt of GDP growth in the initial years between 2009 and 2012. However, the growth rates began to decline steadily after 2012, as global commodity prices began to fall. Export revenues slowed down even as the demand for imports, including of luxury vehicles, rose. Thus, on the one hand, the annual GDP growth rates nearly halved from 8.5 per cent between 2010 and 2012 to 4.5 per cent between 2013 and 2015. The investment rate fell from 39.1 per cent in 2012 to 31.2 per cent in 2015. The savings rate fell from 33.2 per cent in 2012 to 28.8 per cent in 2015. Yet, a counter-cyclical fiscal policy was ruled out, as the government’s hands were tied by the IMF conditionality to keep fiscal deficits in check.
Also read: Which way Sri Lanka?
On the other hand, as foreign exchange reserves fell, a balance of payments crisis emerged. The country also struggled to repay its large infrastructure loans. This was the context in which the IMF entered the scene yet again in 2016. The new government that took power in 2016 approached the IMF for another US$1.5 billion loan for a three-year period between 2016 and 2019. The 2016-19 loan was the 16th loan that Sri Lanka received from the IMF since 1965-66.
THE NEW IMF LOAN
As with the previous 15 loans, the 16th loan carried familiar conditionalities. “The linchpin of the reform programme”, as the IMF termed it, was that Sri Lanka must cut its fiscal deficit from 6.9 per cent of the GDP in 2015 to 4 per cent of the GDP in 2018 and 3.5 per cent of the GDP by 2020. The IMF also asked Sri Lanka to mobilise more revenues through indirect taxes, such as the value-added tax (VAT) instead of infrastructure-financing through the levy of a Nation Building Tax (NBT), rationalise public spending, move from subsidies to direct cash transfers, reform public financial management and state enterprises, adopt inflation-targeting and a flexible exchange rate regime, and liberalise trade and investment.
The health of the Sri Lankan economy further deteriorated between 2016 and 2019. The rate of growth fell from 5 per cent in 2015 to 2.9 per cent in 2019. The investment rate fell from 31.2 per cent in 2015 to 26.8 per cent in 2019. The savings rate fell from 28.8 per cent in 2015 to 24.6 per cent in 2019. Government revenues shrank from 14.1 per cent of the GDP in 2016 to 12.6 per cent of the GDP in 2019. Gross government debt rose from 78.5 per cent of the GDP in 2015 to 86.8 per cent of the GDP in 2019.
Nevertheless, in its 2019 assessment, the IMF praised Sri Lanka for its “commitment to the… programme”, its “efforts to advance revenue-based fiscal consolidation, with a well-targeted 2019 budget” and for its efforts to “strengthen reserves, under greater exchange rate flexibility” and for following “a prudent monetary stance”. It agreed to extend the loan period by one more year, even as it advised the country to move forward with the larger structural reform agenda.
TWO SHOCKS AND A PANDEMIC
The year 2019 witnessed two further shocks to the economy. First, there were a series of bomb blasts in churches and luxury hotels in Colombo in April 2019 in which more than 250 people died. The blasts led to a huge fall in international tourist arrivals; tourist arrivals fell by 71 per cent in May 2019. The extent of decline gradually narrowed thereafter but remained significant at 47 per cent in July 2019 and 9.5 per cent in November 2019. According to a report in Al Jazeera, tourist arrivals fell by 18 per cent over the year. The slowdown in tourism imposed enormous strains on Sri Lanka’s foreign exchange reserves in 2019.
Secondly, a new SLPP government came to power in November 2019 led by Gotabaya Rajapaksa. The SLPP had made two major promises in its election campaign: one, that it would cut taxes and, two, that it would provide major concessions to farmers. In December 2019, taxes were slashed. In indirect taxes, VAT rates were cut from 15 per cent to 8 per cent. The annual threshold for VAT registration was raised from LKR 12 million to LKR 300 million. The Nation Building Tax, the PAYE tax and the economic service charges were abolished. In direct taxes, standard corporate income tax rates were reduced from 28 per cent to 24 per cent. The annual income threshold for waiver of personal income tax was raised from LKR 500,000 to LKR 3,000,000.
The impacts of these steps on government revenues were quick and evident. A report in Financial Times estimated the loss from taxes thus foregone at $2 billion or about 2 per cent of the GDP. Estimates of PublicFinance.lk, an independent public finance platform, showed that there was a 33.5 per cent decline in the number of registered taxpayers between 2019 and 2020. GST/VAT revenues almost halved between 2019 and 2020.
The COVID-19 pandemic arrived in early 2020 on the back of these two economic shocks. An already bad situation turned worse. Exports of tea, rubber, spices and garments suffered. Tourism arrivals fell further. Remittances also fell as Sri Lankan workers lost jobs in different countries. On the other hand, the pandemic necessitated a rise in government expenditures. The fiscal deficit exceeded 10 per cent in 2020 and 2021, while the ratio of public debt to GDP rose to 119 per cent in 2021.
EMBRACE OF PSEUDO-SCIENCE
Fertilizers were among the many items of consumption that Sri Lanka was historically forced to import. As the pressure on foreign exchange grew during the pandemic, Gotabaya Rajapaksa received the advice that foreign exchange could be saved if there were no fertilizer imports. Thus, in April 2021, he announced that imports of all chemicals for use in agriculture would be banned from May 2021. The question of introducing organic farming had been a live topic in Sri Lanka for a while. A section of environmental activists and international groups, based on unscientific reasoning, had been urging Sri Lanka to shift completely to “organic farming”. In 2015-16, when Maithripala Sirisena was the President, the government initiated a three-year long national programme titled Wasa Wisa Nethi Retak, also titled expansively as “A Wholesome Agriculture – A Healthy Populace – A Toxin Free Nation”. The aim was to ensure the provision of food free of chemicals and toxins.
Sirisena’s policy on organic farming was opposed by agricultural scientists. They warned the government of the “danger of going back to the pre-green revolution era”, which could “drastically reduce the production of cereal as well as the other crops”. The scientists suggested that the more appropriate policy to follow would be to ensure Good Agricultural Practices (GAP). GAP is a validated concept in agricultural science. Sirisena, however, refused to heed the scientists’ advice. Yet, the programme did not go further than a fertilizer subsidy reform in 2016, where a price subsidy was replaced with a direct cash transfer payment to farmers.
Also read: Sri Lanka on brink of ruin
When he campaigned for power in 2019, Gotabaya Rajapaksa promised subsidised foreign fertilizers to farmers. But by 2021 he changed his views. Amid the pandemic, he revived Sirisena’s idea and decided to convert all of Sri Lanka’s agriculture into organic agriculture. Most agricultural scientists were excluded from the President’s group of advisers which designed the new policy; in fact, the group was populated with people with dubious credentials. Some among them argued that chemical use in agriculture was the cause for the rising incidence of chronic kidney disease in Sri Lanka even though peer-reviewed research failed to reveal any link between chemical farm inputs and kidney diseases. Kidney diseases were linked by scientists to “hard water in conjunction with fluoride present in many wells”. But such voices of reason were disregarded.
Another presidential adviser had once infamously claimed to have identified a self-generated rice variety that had fed the 10 giant warriors of the Sinhala King Dutugemunu of the Anuradhapura Kingdom between 205 BCE and 161 BCE. Agricultural scientists tested the claim and found that the grain was sorghum, not rice. Yet another adviser had claimed that glyphosate dissolves reservoir bunds. It was not surprising, then, that the adoption of advice from such a group turned out to be disastrous for the Sri Lankan economy.
FAILURE OF ORGANIC FARMING POLICY
To begin with, globally, the share of the total area under organic farming is only 1.5 per cent. Even in the European Union (E.U.), the share of total area under organic farming is only 9 per cent. Thus, to aim for a 100 per cent shift to organic farming in just one month was not just suicidal but plainly ludicrous.
Secondly, agricultural scientists had petitioned the government not to implement the new policy. In a letter to the President in May 2021, the Sri Lanka Agricultural Economics Association (SAEA) wrote that banning chemicals would adversely affect “food security, farm incomes, foreign exchange earnings and rural poverty”. They added that yields may drop by 25 per cent in paddy, 35 per cent in tea and 30 per cent in coconut if chemical fertilizers were banned. As no chemicals were available to spray against fungal leaf diseases, rubber production was also projected to fall by 15-20 per cent. In the long-run, average agricultural productivity may fall by 20 per cent leading to a contraction of the country’s GDP by 3.1 per cent, they warned.
The scientists’ fears turned prophetic. Sri Lanka has two agricultural seasons: the Yala (May to August) and Maha (September to March). When the ban on chemical imports was imposed in May 2021, the Yala season of 2021 had already begun. A good part of the requirement of chemicals for the season had already been imported, and there were prior stocks from the previous Maha season. Hence, Yala production in 2021 was not significantly affected. However, with no imports of chemical fertilisers and pesticides, production and productivity were significantly adversely affected in the Maha season of 2021-22. The IMF concluded in February 2022 that there was a “worse-than-anticipated impact of the chemical fertiliser ban on agricultural production”.
Also read: One law, many problems
According to Buddhi Marambe, an agricultural scientist, the productivity of paddy in the Maha season of 2021-22 was lower by 40-45 per cent compared with the previous Maha season of 2020-21 (see Buddhi Marambe, “The ‘Manmade Agriculture Disaster’ in Sri Lanka”, DailyFT, March 23, 2022). In maize, the production during the Maha season of 2020-21 was 415,000 MT and during the Yala season of 2021 was 50,000 MT. However, in the Maha season of 2021-22, the production of maize is expected to be just 60,000 kg. With skyrocketing maize prices, animal feed costs have risen sharply leading to inflation in the retail prices of meat.
In tea, the total expected production in 2021 was 320 million kg but the actual production was only 299 million kg. Between January and April 2021 (that is, before the import ban), tea production was 21 million kg higher than between January and April 2020. However, between October and December 2021, tea production was 12 million kg lower than between October and December 2020. Similarly, in February 2022, tea production was 20 per cent lower than in February 2021.
The organic farming policy had two other perverse outcomes. First, when productivity fell, there were widespread farmers’ protests. The government was forced to compensate farmers who faced a loss of productivity. Marambe notes that LKR 40 billion was paid to paddy farmers alone as compensation in the Maha season of 2021-22. However, the total expenditure planned for the import of chemical fertilizers for all crops for the full year of 2020 was only LKR 36 billion. Secondly, though Sri Lanka had come close to self-sufficiency in rice production by 2019, the total planned import of rice in 2022 was 300,000 MT from Myanmar and 1 million MT from China. Together, these imports constituted 54 per cent of Sri Lanka’s annual rice requirement.
The organic farming policy was finally withdrawn in November 2021, but not before it had imposed extraordinary costs on the Sri Lankan economy.
This, in essence, is an outline of the economic crisis that has engulfed Sri Lanka. It has had many elements to its evolution and development: historical imbalances in the economic structure; the external imposition of neoliberalism by the IMF; the shift to a right-wing, authoritarian political regime; and the official embrace of pseudo-science. Soon, Sri Lanka will be forced to approach the IMF for a 17th loan. This new loan is certain to come with new conditionalities. The IMF has already indicated that VAT rates may have to be raised but alongside a tighter fiscal and monetary policy—the hallmarks of classic IMF interventions. However, it has given no indications of any concession on past debts, without which Sri Lanka may just enter yet another vicious cycle of neoliberalism, which would only heap further misery on the people.
- Ramakumar is Professor, Tata Institute of Social Sciences, Mumbai.
COVER STORY: SRI LANKA’S WORSENING CRISIS …….. Inherited problems that led to Sri Lanka’s economic crisis ….. C.P. CHANDRASEKHAR……………..Print edition : April 22, 2022
A container vessel being offloaded at the East Container Terminal of the Colombo port on June 2, 2021. In 2021, the Gotabaya Rajapaksa government cancelled a tripartite agreement that the Maithripala Sirisena government signed with India and Japan in 2019 for the development of this container terminal and handed the contract to the Chinese government’s China Harbour Engineering Company. Photo: Ishara S. Kodikara/AFP
The main entrance of the Central Bank of Sri Lanka in Colombo. The bank had been avoiding a devaluation by keeping the official exchange rate at 200 rupees to the dollar for months, but at the end of the first week of March, it gave in and devalued the currency by 15 per cent. Even that level was unsustainable, and the rupee was soon allowed to float, setting off a fall to the 300 rupees to the dollar mark by end March. Photo: Dinuka Liyanawatte/REUTERS
People queuing up to buy kerosene oil for home use at a petrol station in Colombo on March 21. Photo: Ishara S. Kodikara/AFP
The Sri Lankan crisis has been intensified by the pandemic and the war in Ukraine. However, the government’s attention is focussed on its foreign exchange crunch. If the international community does not roll over loans and hike assistance, a sovereign default is likely.
Sri Lanka’s economy is sliding into chaos, afflicted with multiple crises: a steep fall in foreign exchange revenues because of the COVID pandemic, a difficult-to-manage external debt servicing burden, a collapse in the volume of foreign exchange reserves and, finally, the ripple effects of the war in Ukraine. Between January 2020 and mid March 2022, foreign exchange reserves fell by as much as 70 per cent to around $2.4 billion. A collateral trend that compounds the crisis has been a sharp depreciation of the Sri Lankan rupee. The Central Bank of Sri Lanka (CBSL) had been avoiding a devaluation by keeping the official exchange rate at 200 rupees to the dollar for months, but at the end of the first week of March, it gave in and devalued the currency by 15 per cent. Even that level was unsustainable, and the rupee was soon allowed to float, setting off a fall to the 300 rupees to the dollar mark by end March.
Underlying the crisis was a set of accumulated weaknesses that were intensified by the pandemic, which adversely affected tourism earnings and revenues from exports. As compared with earnings from tourism of $4.4 billion in 2018 and $3.6 billion in 2019, receipts fell to just $682 million in 2020 and $534 million in 2021, according to figures from the CBSL. Export revenues fell from $11.9 billion in 2019 to $10 billion in 2021 and rose to just $12.5 billion in 2021.
The resulting foreign exchange earnings crunch has hit Sri Lanka particularly hard because of its large external debt of around $35 billion. Much of this is a historical legacy. Under the previous Mahinda Rajapaksa government, between 2004 and 2015, Sri Lanka borrowed externally to the tune of $14.06 billion. Its debt service payments in 2022 are estimated at $6.9 billion.
Combined with the fall in foreign exchange earnings, these large outflows on account of interest and amortisation payments on accumulated foreign debt have eaten into foreign reserves, which fell to $2.8 billion at the end of July 2021. That figure was shored up for a short while with receipts of $780 million from the International Monetary Fund’s (IMF) special SDR (special drawing rights) allocation, first disbursals from a currency swap arrangement between the Sri Lankan and Bangladeshi central banks, and rounds of support from China and India. It did not help that the final tranche of a standby line of credit under the IMF’s Extended Fund Facility negotiated in June 2016 was held back because of reported delays in completion of a review of performance. Because of these factors, Sri Lanka has been severely short of foreign exchange and its rupee has been depreciating significantly. It began 2022 with just $1.6 billion in the kitty.
In response, for some time now, the government, not wanting to be seen as defaulting on external debt payments, has been curtailing imports. It announced a wide-ranging import clampdown in 2020 to reduce foreign exchange outflow, affecting goods ranging from motor cars to fertilizers, sugar and turmeric. Particularly contentious was the Gotabaya Rajapaksa government’s decision to ban imports of chemical fertilizers and pesticides, justified as reflecting a commitment to organic farming but really influenced by the foreign exchange shortage. Although subsequently rescinded, the import ban is expected to reduce domestic production of paddy and tea in the coming months.
For a country dependent on imports for a range of manufactured capital and consumption goods, the clampdown resulted in limited supplies of imported fuel and long queues of harried motorists at gas stations; power outages; hospitals running out of stocks of critical drugs; shortages of milk, food and cooking gas; suspension of examinations at educational institutions because of non-availability of paper to print question papers; and newspapers dropping print editions because of lack of newsprint. The fall in agricultural production following the ban on chemical fertilizer and pesticide imports has only increased dependence on imported supplies. Shortages have hit the poor and middle classes badly, and political observers argue that the country could experience food riots.
These outcomes feed into each other and aggravate the situation. A falling rupee has increased the costs of imports and worsened inflation. The depreciating currency has also worsened the foreign reserves position because exporters are holding back on repatriating proceeds and Sri Lankan workers abroad are avoiding official channels for remitting funds back home to benefit from the much better “black market” conversion rates they get when using informal circuits. Thus far, the government has privileged repaying foreign lenders over diverting foreign exchange to finance imports that would alleviate shortages. In January 2022, when the CBSL announced that it was allocating $500 billion for a debt repayment instalment, some of the country’s leading economists urged the bank to default and divert that foreign exchange to access crucial imports.
With agriculture production falling and cultivation turning non-viable, industrial units operating at less than full capacity because of lack of demand and/or restricted access to crucial inputs, and tourist arrivals being low for two years now, the economic crisis is deep. In addition, the imported inflation resulting from rising fuel prices and a steeply depreciating currency are pushing up input costs that cannot be matched with increases in the prices of goods and services produced with those inputs. Finally, to the extent that firms have foreign exchange liabilities to service, the local currency costs of that commitment would be soaring. These trends can trigger a wave of bankruptcies. All these troubles had already afflicted Sri Lanka before the Ukraine invasion, which has made matters much worse, especially because Russia and Ukraine are important trade partners and sources of tourist arrivals. Meanwhile the government muddles through, keeping the economy afloat with aid and credit from neighbours, especially China and India, and is now wooing the IMF, which it had shunned because of the conditions it imposes on borrowers.
Between two neighbours
Sri Lanka has been successful in the past playing the two neighbours against each other to maximise the bilateral support it receives. However, until recently Sri Lanka had leaned more on China than India, benefiting from projects under the Belt and Road Initiative and obtaining large bilateral foreign exchange swap arrangements with the Chinese central bank. In return, Sri Lanka had favoured China, with the Rajapaksa government cancelling in 2021 a tripartite agreement that the Maithripala Sirisena government signed with India and Japan in 2019 for the development of Colombo port’s East Container Terminal and handing the contract to the Chinese government’s China Harbour Engineering Company. This and other acts of the Sri Lanka government have upset India in the past, and the gesture of providing India’s Adani a second port terminal near the original one has not smoothed ruffled feathers. Sri Lanka has also not shown much enthusiasm regarding a host of projects India was to initiate in the country on the basis of a memorandum of understanding former Prime Minister Ranil Wickremesinghe signed with the previous Narendra Modi government in 2017 during a visit to New Delhi.
But matters seem to have changed recently, with signs of some tension between Beijing and Colombo. One factor that played a role was the Sri Lankan government’s decision to cancel an order for organic fertilizers placed on China’s Qingdao Seawin Biotech Co. Ltd after a consignment of 20,000 tonnes had reached Sri Lanka. Alleging that the consignment was carrying the Erwinia bacteria that can destroy crops, Sri Lanka refused to permit offloading of the consignment and make payments against the order. Sensing an opportunity, India stepped in and provided emergency supplies of nano nitrogen to partially meet the demands of Sri Lankan farmers.
Also read: Sri Lanka on brink of ruin
Sri Lanka has also decided to suspend the development of hybrid energy systems in three northern islands by Sino Solar Hybrid Technology because of security objections raised by India regarding Chinese involvement in projects that are extremely close to its coastline. China has made it clear that the projects were dropped because of third-party intervention. India is now supporting substitute projects.
It is not clear, however, how much further support China and India would between them provide to reduce domestic shortages and dampen inflation and shore up Sri Lanka’s foreign exchange reserves until dollar earnings revive. If that support is inadequate, the only other option is the IMF. The Rajapaksa government was wary of being subject to the IMF’s conditionalities again but is now open to a discussion. If a deal is struck, the IMF is likely to demand strong measures that will intensify the pain.
The problem is that the Sri Lankan government is not able to mitigate the effects of the crisis because its own fiscal position is strained. Even while burdened with legacy and newly accumulated public debt, the current Rajapaksa government decided in December 2019 to slash the value added tax (VAT) rate to 8 per cent from 15 per cent as well as offer other tax concessions such as abolition of the 2 per cent nation building tax on domestic goods and services, the withholding tax and the capital gains tax on stock market gains. This tax bonanza is estimated to result in a loss of revenue equivalent to 4 per cent of the gross domestic product annually. This has aggravated the post-COVID collapse in revenues, and efforts to correct the error with a surcharge on the super-rich and a couple of other adjustments in the Budget for 2022 were too little too late.
However, the foreign exchange crunch is the focus of the Sri Lankan government’s attention. If competing neighbours, China and India, and the rest of the international community do not roll over loans and hike assistance, a sovereign default is likely.
Explained: Why Sri Lanka defaulted on its foreign debt
Published : April 15, 2022 17:01 ISTT+ T-
Experts say Sri Lanka’s economic momentum has been curtailed by a series of poor policy decisions. Photo: Eranga Jayawardena/AP Photo/picture alliance
A few years ago, business on the island nation was booming. Now Sri Lanka is broke. What went wrong?
Sri Lanka, the island nation in the Indian Ocean with a population of nearly 22 million, has plunged into a deep economic crisis. With more than $50 billion (€46 billion) in external debt and a shortage of foreign exchange reserves, the country is currently struggling to pay for essential imports. This has led to sharp increases in the price of essential commodities like rice, fuel, and milk. A fuel shortage recently left much of the country suffering through a 13-hour power cut.
Sri Lanka’s foreign debt obligations for this year exceed $7 billion. But the country’s forex reserves as of March 2022 is just $1.6 billion. On April 12, the country announced a default on all its foreign debt. Now Sri Lanka is hoping for an IMF bailout to save it from the worsening crisis. A few years ago, Sri Lanka seemed to be on the right track. Tourism was booming, with mega-infrastructure projects were making headlines worldwide. Today the country is insolvent and prices are skyrocketing.
A series of questionable decisions
A financial crisis had been brewing for more than a decade in Sri Lanka, where International Sovereign Bonds (ISB) — or market borrowing — constitute a major portion of the country’s foreign debt. “Since graduating into a lower middle-income country in the early 2000’s, successive Sri Lankan governments have been increasingly borrowing from private international capital markets through the issuance of sovereign bonds, seriously contributing to the precarity of the balance-of-payments of the country,” said Dr. Muttukrishna Sarvananthan, development economist and principal researcher at the Point Pedro Institute of Development in Sri Lanka. “This capital-market borrowing is unconditional, with relatively high interest rates and much shorter durations of repayment.”
ISBs account for nearly half of the country’s total outstanding external debt. A sharp decline in the market prices of these bonds followed Sri Lanka’s announcement on April 12 of a pre-emptive default on its foreign debt. “The sovereign default was a necessary and inevitable evil to convince the IMF about the political stability amidst widespread and continuous public protests all over the island,” Sarvananthan said.
Tax cuts gone wrong
Sri Lanka’s government recently offered unsolicited value-added and income tax cuts to taxpayers. This led to an extreme loss of government revenue. As a consequence, the Sri Lankan Rupee started to slip. Without the necessary cash reserves in place, in early March Sri Lanka had to allow the rupee to free fall. In such a case, interest rates should also be increased, said Sarvananthan. This serves to stop the huge rise in overall inflation, which reached nearly 20 per cent in April, and 30 per cent for food.
The Central Bank of Sri Lanka did eventually hike interest rates by seven per cent. “However, severe damage has been already inflicted to the economy and it will take at least five years to recover from this mess,” said Sarvananthan. A reduction in indirect consumption taxes such as the VAT could have been beneficial for ordinary people, he adds, but the rich and crony capitalists wanted reductions in corporate and personal income taxes. The COVID-19 crisis and the war in Ukraine are also pushing up global commodity prices. “However, primarily the economic crisis is home-made and long-running and therefore Sri Lanka should own it instead of passing the buck,” said Sarvananthan.
The government made a slew of policy decisions which resulted in macroeconomic imbalances on all fronts and this exacerbated the economic crisis, says Dr. W.A Wijewardena, former deputy governor of the Central Bank of Sri Lanka. These mistakes range from the tax cuts to poorly thought out borrowing to selling forex reserves to prop up the exchange rate with the dollar to an overly ambitious shift to organic farming which caused a significant drop in agricultural output.
Still a strategic partner
China holds a significant portion of Sri Lanka’s total foreign debt, nearly 10 per cent, with more held by Japan, the World Bank and the Asian Development Bank. India holds nearly three per cent. Regional powers India and China have been competing with each other to gain a foothold in the strategic island nation. Sri Lanka is a critical link for China in their Belt and Road global infrastructure projects. For India, Sri Lanka is a geo-politically significant country.
“Sri Lanka had been a neutral nation between these two regional powers without taking a side,” said Wijewardena. “In the past, it had helped to receive economic benefits from both countries without offending either one. However, in the recent past, there has been competition between these two powers to help Sri Lanka and gain a foothold in the country over the other.” These geopolitically driven motives are the main reason why the administration of current Sri Lankan president Gotabaya Rajapaksa has had the false idea that it could do without IMF’s help, he added.
A band-aid for a bullet hole
With Sri Lanka down on its luck, both countries continue to play nice. In January, India agreed to defer an Asian Clearing Union payment of $515 million and extended an emergency trade credit of $500 million. In March, it extended another trade credit of $1 billion through the State Bank of India. Sources say that India is open to an additional $2 billion in aid for Sri Lanka.
“Sri Lanka has requested China for debt restructuring but China is yet to grant this request,” said Wijewardena. “Initially it had shown willingness to give another loan of $2.5 billion to enable Sri Lanka to refinance the maturing loans but it was withdrawn later. Instead China provided relief to Sri Lanka by providing a Yuan swap of 10 billion Yuan.”
This swap amounts to nearly $1.5 billion, giving a major boost Sri Lanka’s forex reserves. But it’s still not enough to mitigate the crisis. Sri Lanka’s current strategy is to get relief through common debt restructuring with the support of IMF. “It will provide a breathing space to Sri Lanka but not a permanent solution,” said Wijewardena. “A permanent solution lies in Sri Lanka gaining the capacity to honor its debt obligations by improving forex inflows through the development of the export of goods and services and by offering facilities for foreign direct investment to take place.”
FOREIGN EXCHANGE CRISIS……….Sri Lanka’s forex crisis bodes ill for tottering economy…… R.K. RADHAKRISHNAN Print edition : April 22, 2022T+ T-
A protest outside the Central Bank of Sri Lanka office in Colombo on March 30. Photo: ISHARA S. KODIKARA/AFP
A tourist pushes his scooter to stand in queue at a fuel station in Weligama on March 26. Photo: ISHARA S. KODIKARA/AFP
A money exchange counter in Colombo, a file picture. All major Sri Lankan banks have counters outside the airport where the buying rate of foreign currencies is displayed. Very few people use these counters now because the rates are much lower than what the local currency market offers. Photo: REUTERS
In a restaurant in Mirissa during a power outage on March 25. During COVID, remittances went down drastically because of job losses in West Asia, and tourism revenue was nil. Photo: ISHARA S. KODIKARA/AFP
Low worker remittances and falling tourism revenue as a result of COVID-19 and diminishing export earnings have, among other reasons, triggered a massive foreign exchange shortfall that has aggravated an already precarious economy in Sri Lanka. And there seems to be no end in sight.
At 11.20 a.m. on March 30, as the Chennai-Colombo SriLankan Airlines flight began its descent in Colombo, an announcement over the aircraft’s public address system gave out the usual instructions laced with pleasantries, welcoming all passengers to the Bandaranaike International Airport. But it did not stop there. A warning and a threat followed, and they had to do with how the passenger converted the foreign currency he or she was carrying: “If you are a tourist, please retain your travel exchange receipts until your travel is completed. Use only banks or authorised foreign exchange dealers appointed by the Central Bank of Sri Lanka [CBSL] to change your currency.” Then came the threat [paraphrased quote]: “If you change your foreign currency with unauthorised agents, you may be involving yourself in criminal activities.”
The reason for this warning and threat, in a country with a draconian Prevention of Terrorism Act with wide powers to incarcerate anyone without any reason assigned, was not hard to find. It related to the difference in foreign exchange rates between the official channels and the grey market.
All major Sri Lankan banks had counters outside the airport where the buying rate of foreign currencies was displayed. A U.S. dollar, the most sought-after currency in Sri Lanka, that morning equalled Sri Lankan Rupees (LKR) 289. Except for those who are new to Sri Lanka, no one uses these counters any longer because the rates are much lower than what the local currency market offers. This was the reason for the announcement on the flight.
To check the rate in the open market, this correspondent asked an acquaintance to convert some dollars into LKR in the local market. In some time the acquaintance called to announce a conversion rate of LKR 385 to a dollar. Even as one came to terms with the gap in this market reality, Ranga Srilal, a journalist, tweeted at 4 p.m.: “U.S. dollar clears the 400 barrier. The grey market offered 410 rupees (LKR) to the dollar in response to CBSL warnings that money dealers quoting better than commercial bank rates will be prosecuted. Traders have told @an_cabraal [CBSL Governor] where he can put his lame threats.”
The Indian rupee is welcome too. A google search will give you the INR (Indian currency) to LKR rate at 3.87 per rupee. The grey market offers significantly more; depending on the day, the conversion rate can be up to LKR 5 per INR.
Central Bank’s role
CBSL Governor Ajith Nivard Cabraal did act on his threats. On March 31, he tweeted: “The suspension of the money changing license of the first errant money changer has just been announced by the CBSL.” A CBSL press release issued the same day read out the riot act to money changers: “The Central Bank has intensified its on-site investigations at Authorised Money Changing outlets and will stand ready to suspend/revoke permits of Authorised Money Changers who do not adhere to the Directions issued under the Foreign Exchange Act.”
Cabraal does not appear to realise what the problem is. One response to his triumphant tweet read: “If the government banks are capable of releasing required $ [USD] at a proper rate, demand for these places will go down rapidly. As of now, it is close to impossible to get $ released for critical activities such as foreign travel or educational payments.”
“Fix the root cause and not the symptoms,” the tweeter added.
Several upper middle class families in Colombo and elsewhere are worried about the higher education of their children. In Sri Lanka, education is free and students are taught in the mother tongue from Class 1 to 12 (A level). (There is also a parallel international school system where students have to pay to learn in the English medium.) Thereafter, undergraduate education is governed by a complicated system of reservation.
Seats in undergraduate courses are limited, hence many parents who can afford it send their children abroad to study. This has now given rise to a new problem because banks are refusing to release the foreign exchange needed to pay fees for the new term.
In one case, a local businessman instructed his bank to send his son’s term fees to an educational institution in Australia. At the then prevailing exchange rate, the bank calculated the amount to be nearly LKR 20 lakh. The bank later informed the businessman that the money would be sent as soon as adequate foreign exchange was available at the bank and taking into consideration the various priority categories the bank had been asked to follow.
A few days later, the businessman received a call from the bank informing him that his turn for accessing foreign exchange had come and that he would have to pay an additional LKR 10 lakh because the value of the Sri Lankan rupee had dropped. Obviously, he had no choice.
Not just education, entertainment too suffers. PeoTV, operated by SLTMobitel (Sri Lanka Telecom and a private firm MobiTel), had to discontinue some channels, aired from abroad, because of the foreign exchange crisis. As one switches on any of these channels, a message plays out to the accompaniment of music: “The Channel Partner [in this particular case] (Star Sports) has temporarily stopped its transmission owing to the difficulties faced by us in making outward remittances due to reasons beyond our control. We apologise for the inconvenience caused and we are making our best efforts to restore the services as soon as possible.”
Getting around the problem
As always, people find ways to work around any problem. An employee of a multinational company spoke about the difficulties of staying in Colombo as inflation spirals. Asked about his salary, he said he brought into Sri Lanka only 30 per cent of his salary. “My company remits 70 per cent of my salary into an account abroad and sends me the rest…. If all the money is brought here, I will not be able to repatriate when I leave or when I travel abroad. It is too much of a risk,” he said.
One exporter highlighted the difficulty of doing business because of the exchange rate. “When the payment comes in for my exports [after taking the credit period into account], it is far lower than the market rate. How can I manage?” he asked.
An importer said there was no way he would be able to predict the price of a product in the market, or even the landed cost. “I state a price today for a shipment of say, steel, which I will get delivery in about three or four months’ time. Usually, we consider the market of the product, factor in our mark up, and then quote. Now, because of the galloping rupee, all predictions have been thrown out. I have no idea what to quote as a selling price for a product that I have imported,” he said.
Big companies, including those dealing with specialised equipment such as elevators, pass on the cost to their customers. “Customers are unhappy. But we are helpless too,” said a dealer.
Also read: Sri Lanka on brink of ruin
Exporters get around the problem in multiple ways. One way is to incorporate an importing firm and insist that the foreign exchange it earns be used to finance these imports. Another is to direct the bank to use the foreign exchange to be used for another company with which the exporter has made a deal. A third involves a complicated formula of booking losses in your exports and getting the foreign buyer to pay much less than what was agreed on paper. (The rest is paid in a foreign bank account.)
The bottom line is clear: placing too many restrictions on people does not work. But that is a lesson that neither the Central Bank nor the Finance Ministry seems to understand. “There are ways to get out of this self-made crisis,” said a top management professional. “But the question is: who will listen now? The crisis is so all-engulfing, what’s happening is hourly firefighting only.”
It was only early this month that the CBSL decided to allow “greater flexibility in exchange rates”. A March 7 press release stated: “The Central Bank is of the view that forex transactions would take place at a level which are not more than Rs [LKR]. 230 per US dollar.” On March 24, the CBSL and the Ministry of Finance assured people that “the banking system is stable, and that the operations of the State Banks are being carried out smoothly, contrary to statements made otherwise”.
Glossing over reality
This seems to be an attempt to gloss over reality. The Sri Lankan government has borrowed heavily from banks, and there seems to be no end in sight. For instance, one government official said that the government’s overdraft with just one bank, the Bank of Ceylon, is “in the range of 500 billion” LKR.
A senior official explained the problem in simple terms: Sri Lanka has an annual import bill of about $20 to $23 billion. It has exports worth $13-$15 billion. The remaining foreign exchange shortfall is made up by worker remittances and tourism. During COVID, remittances went down drastically because of job losses in West Asia, and tourism revenue was nil. But the government was forced to spend because of the COVID crisis. This aggravated an already precarious economy, which was treading a fine line between disaster and default.
Add to this the fact that the government has to pay back International Sovereign Bonds (ISB) as they mature. Another $1 billion worth ISB (according to a government official; outsiders put it at much more) has to be paid back in June. “If you default today, you are gone. No one will lend to you,” Nalaka Godahewa, State Minister for Urban Development, told a local cable TV station. In his view, all governments borrowed to pay interest. That route should be followed now too.
This is where the aid that India and China and others offer falls short, because the money that is given or promised is much less than what Sri Lanka requires. Unless Sri Lanka bridges the shortfall in foreign currency (between exports and imports) the problem will not go away. “Imagine the gap as a wound. Is there a point in treating one part of the wound while leaving the rest unattended?” asked an official, who has a role to play in the current crisis.
One official who has deals with the Finance Ministry said that he was not even sure whether the top officials in the Ministry or those in the Central Bank understood the enormity of the problem. As an example, he pointed out the post-COVID situation on worker remittances.
Worker remittances did pick up post-COVID because of the CBSL’s policies. The exchange rate offered was at least LKR 20 less than what was on offer in the grey market in January. Many chose the grey market not merely because the rates were higher but also because of other facilities—money would be picked up from their places of work or home in West Asia, and hawala routes delivered the money to the person’s residence in Sri Lanka. “I am not even sure if the entire finance management team in the country is capable of asking what is needed for the country at this juncture. One possible solution is for India to stand guarantee in the range of the shortfall, about $5 billion,” he said.
But even this has not been requested from the Sri Lankan side. In his view, there is no point in giving money to Sri Lanka because there seems to be no plan on how to deploy the money effectively. It has to be in the form of aid that can reach the people, he said.
While tourist arrivals in the country are increasing (96,507 in February 2022; a 2,700 per cent plus jump compared with February 2021), there is no guarantee that this trend will last if the unrest in Sri Lanka continues. On the night of March 31, police used tear-gas on protesters in front of the presidential residence after a police bus was set on fire. If the social unrest is not curbed, tourism income can as well be forgotten.
This is the chicken-and-egg situation. The unrest cannot be tackled without ‘hard’ decisions. But people have had enough of hard decisions. Going by the sentiment on the street, they want the current administration to step down. They believe that is the first step towards a solution. Therein lies Sri Lanka’s greatest problem. The Rajapaksas, after all, enjoy a good majority in parliament.
Imploding island: Sri Lanka on brink of ruin ……………..….. R.K. RADHAKRISHNAN…………. Print edition : February 11, 2022T+ T-
At a demonstration against the shortage of essential commodities, in Colombo on January 5, 2022. Photo: AFP
President Gotabaya Rajapaksa arrives for the ceremonial opening of the second session of the ninth parliament, in Colombo on January 18, 2022 . Photo: AFP
Chinese Foreign Minister Wang Yi with Sri Lankan Prime Minister Mahinda Rajapaksa during an official meeting in Colombo on January 9, 2022. Photo: AFP
People queueing up to buy liquefied petroleum gas (LPG) cylinders in Colombo on December 31, 2021, as shortages of essentials gripped the island following a severe foreign exchange crunch that hurt imports. Photo: AFP
Rank mismanagement is driving Sri Lanka to ruin. President Gotabaya Rajapaksa’s irrational policies coupled with serious economic problems have impoverished the nation, which is also reaping the fruits of playing India against China for a decade.
Crisis after crippling internal crisis is rocking Sri Lanka, even as the island nation struggles between an unyielding India, which is making some attempts to retain its pre-eminence in South Asia, and an assertive China, which is determined to extract its pound of flesh by using all means at its disposal.
The country is facing a serious food crisis exacerbated by irrational government policies forced on farmers (which were withdrawn later). On top of this, it is battling runaway inflation, an economy in the doldrums, the near-collapse of the electricity generation and distribution system, and the COVID-19 crisis. And the troubles do not end there.
The situation has been aggravated by gross mismanagement by President Gotabaya Rajapaksa and his coterie of favoured friends and former Army colleagues, who have displayed their incompetence in many of the jobs they have been entrusted with.
When he assumed office in 2019, riding a wave of fear after the Easter terror attacks on churches and hotels which killed over 250 that year, President Gotabaya Rajapaksa was the biggest hope for a strong and safe Sri Lanka.
That image is now in tatters. In its place is a person increasing seen as a liability, one who is hastening the decline of Sri Lanka with his obstinacy, irrational ideas and undependable policies.
Taking the current situation into consideration, the Canadian government issued an advisory to its citizens on January 14, stating: “The deteriorating economic situation is affecting the supply of basic necessities and the delivery of public services. Keep supplies of food, water and fuel on hand. Monitor local media for information.”
Six days later, the Sri Lankan Foreign Ministry protested in a long-winded press release, in which it claimed that the Canadian advisory included “erroneous and outdated information” that did not “reflect the actual situation in Sri Lanka”.
A troubled economy
Sri Lanka’s biggest problem is its economy. It faces a particularly tough year, since it has to pay as much as $6.9 billion in debts in 2022. With a precarious foreign exchange reserves situation, and not much hope for an early revival given the third wave of COVID-19, it treads a dangerous path, with the looming possibility of sovereign default amid growing public restlessness.
Economists writing in major newspapers have asked the government to prioritise ensuring food for people over paying up maturing foreign bonds and loans. But the government is in no mood to listen to them.
On January 18, when a $500 million sovereign bond matured, Central Bank of Sri Lanka (CBSL) Governor Ajith Nivard Cabraal announced that Sri Lanka had kept its promise and repaid the amount. This was done by selling gold, cashing in on currency swap arrangements with China and India, asking the big banks to stop opening letters of credit, and maintaining control on most imports. By doing this, Sri Lanka has kept its record clean of not defaulting on international debts.
Every move of the government invites widespread criticism, which resonates with the ever-suffering public because of the runaway inflation.
Harsha de Silva, MP and former Minister, tweeted on January 15: “Has ‘Never-to-IMF’ governor @CBSL sold last remaining 3.1 tonnes of Sri Lanka gold reserve? There is speculation that he has.”
He added: “Kicking the can down the road a bit further with India ACU 2-month delay of $515 million. Moving closer to unprecedented socio-political-economic catastrophe.” He was referring to the two-month deferral of the Asian Clearing Union (ACU) settlement of $515 million facilitated by India. The ACU is a payment arrangement among nine Central banks in Asia.
Also read: One law, many problems
The situation was worse a few months ago. In November, it seemed Sri Lanka would not be able to repay. By end-November 2021, its foreign exchange reserves had depleted to $1.6 billion, barely enough for a month’s import of essentials, leading to a slew of foreign exchange control measures that were described as “too harsh” by many people belonging to the middle class.
By December, most rating agencies had downgraded Sri Lanka’s sovereign ratings because of perceived default possibilities in 2022. As on January 18, Sri Lanka, which cashed in on a Chinese currency swap arrangement and managed to lift its reserves to just over $3 billion, had managed to keep the default at bay.
India also had a role in ensuring that Sri Lanka did not default: after tough negotiations, it offered a $400-million currency swap to Sri Lanka. India has also offered a $1-billion line of credit to buy food and medicines, and bought some grace time with the ACU. On January 18, India announced “a new Line of Credit of $500 million to Sri Lanka for purchase of petroleum products”. The CBSL “deeply welcomed” the India-Sri Lanka “understanding” which would “greatly stabilise Sri Lanka’s external sector further”. The announcement came at a time when Sri Lanka’s main electricity generation plant, Sapugaskanda, had halted production since it ran out of furnace oil and at a time when the Indian subsidiary of Indian Oil Corporation, LankaIOC, informed the Ceylon Electricity Board that it could not supply fuel because it did not have enough stocks.
A release issued by the Indian High Commission in Colombo said: “External Affairs Minister Dr S. Jaishankar extended this critical support in his letter addressed to the Foreign Minister of Sri Lanka, Prof. G.L. Peiris…. These measures are in line with India’s commitment to stand with Sri Lanka, contribute to Sri Lanka’s economic growth and impart greater momentum to bilateral economic and commercial partnership.”
There is just one sign of hope—a revival in tourism, with international arrivals rising to about 3,000 a day. But another major source of revenue—foreign remittances—is fast drying up. Since the Sri Lankan government wants to artificially hold the U.S. dollar to the Sri Lankan rupee at a rate of 200, it appears that foreign workers’ remittances are coming back to the country via the hawala route.
The Sri Lankan website http://www.publicfinance.lk reported: “Sri Lanka’s worker remittances were down 60 per cent from a year earlier to $325.2 million in December 2021, with foreign exchange diverted to the unofficial market as money printing undermined the credibility of 200 to the U.S. dollar peg. Full-year 2021 official remittances were down 22.7 per cent to $5,491.5 million.”
Alarmed, the CBSL put out a few messages to arrest the trend. One such message on Twitter on December 27 said: “Are you sending money from a foreign country to Sri Lanka or from Sri Lanka to a foreign country? If so, by using informal money transferring mechanisms, you could unknowingly become part of a money laundering or a terrorist financing ring.”
India, China in Sri Lanka
India and China stepping in to help Sri Lanka out of its current financial crisis is the only example of the two Asian giants working together with the purpose of bailing out a struggling economy. Sri Lanka, in trying to play India against China, has mostly not got the results it desired.
India-Sri Lanka relations worsened after the the war with the Liberation Tigers of Tamil Eelam (LTTE) ended in 2009. An increasingly self-assured Sri Lanka took away from India a piece of land in the prime Duplication Road (RA de Mel Mawatha) in Colombo in 2011 and gave it to China for commercial development. India had planned to use the land for construction of residences for its diplomats and other officials. It has been a rocky road from then on. Sri Lanka tried to repeatedly tell India that the government processes took too long to complete and its development needs were better serviced by China.
Former President Mahinda Rajapaksa once told this correspondent: “India takes too long [to clear a project]. So we are forced to go to China or others.” But a former Indian diplomat, who was once stationed in Colombo, said that this was not entirely true: “In India, we have checks and balances but there is no inordinate delay. I know of at least one instance where a proposal was given to us and just over a week later, also given to China.” The Chinese approved it faster.
The game of playing India against China went on for close to a decade.
To date, India has not taken over a project it executed owing to non-payment by Sri Lanka. (According to officials, almost all the large projects have massive grant components.) But that is not the case with China. China has taken over the Hambantota port because Sri Lanka failed in its obligations to service the debt.
Also read: Which way Sri Lanka?
There are more such white elephant projects that have proved to be a burden for Sri Lanka. They include the Lotus Tower, the Mattala Mahinda Rajapaksa Airport and the Hambantota convention centre. India had expressed interest in the airport, which is considered the world’s emptiest airport, but Sri Lanka has been reluctant to agree to an Indian takeover. India and Japan wanted to develop a part of Colombo Port, but Sri Lanka, after initially agreeing to the proposal, handed over the project to China. It later stated that another similar expansion project would be given to India. A large chunk of India’s exports and imports are routed through Colombo Port. The only Indian ‘success’ of late has been Sri Lanka’s decision to finally hand over a part of the Trincomalee oil tank farm to India for development. A part of this Second World War structure, built by the British to store petroleum products, will be jointly developed with the Ceylon Petroleum Corporation. But even this decision came after more than a decade of negotiations.
China has been pushing its agenda with a force rarely seen in international relations. At the conclusion of the visit of Chinese Foreign Minister Wang Yi in the second week of January, China said in a release that China-Sri Lanka relations “do not target a third party and should not be interfered with by any third party”. The third party referred to here is India. The statement came against the backdrop of a Chinese company being forced to shift its solar energy project from north Sri Lanka to the Maldives.
Wang Yi also proposed to form a forum on the development of Indian Ocean island countries, The Hindu reported on January 11. This forum is expected to cement China’s position as a major development and trade partner with south Asia’s smaller economies. This forum “sounded similar to Prime Minister Narendra Modi’s SAGAR (Security and Growth for All in the Region) initiative”, the report said.
India chose the day Wang Yi landed in Sri Lanka to inaugurate an India-funded intercity train. A release issued on January 9 by the Indian High Commission said: “A ceremony to start Mount Lavinia to Kankesanthurai Intercity services using recently received Full AC Diesel Multiple Units (AC DMUs) from India under Indian loan facility was held on January 9, 2022. Sri Lankan Minister of Transport Ms. Pavithra Wanniarachchi was the chief guest.” The release added: “India’s total development portfolio in Sri Lanka is over $3.5 billion, of which around $570 million are purely grant projects. Modernisation of Railways and creation of new Railway infrastructure have been important sectors of focus under the Indian government’s development portfolio in Sri Lanka, in line with the priority of the government and people of Sri Lanka.”
On January 14, the day of the Tamil harvest festival Pongal, India handed over 1,000 houses built for hill country Tamils using an Indian grant. The Indian High Commission said: “Indian Housing Project is a flagship development assistance programme in Sri Lanka which is being carried out in different phases. 46,000 houses were built/repaired in northern and eastern Provinces of Sri Lanka in the first two phases. Another 10,000 houses shall be constructed in the plantation areas in the next phase. This would take Government of India’s overall commitment under the project to 60,000 houses.” Meanwhile, in Colombo, China’s 665-acre, $1.4-billion island hub is getting ready.
On January 16, a long queue of Sri Lankan citizens waited patiently to enter the public viewing gallery of the Chinese-built Port City in Colombo, a vast swathe of land reclaimed from the Indian Ocean and marketed to ordinary Sri Lankans as the next big financial hub of the world. The ‘city’ has been in the making for nearly a decade, and China wants to showcase this as a unique project in South Asia, largely to deflect attention from the fact that most Chinese projects across the island nation are defunct or barely functional.
Also read: Under fire
Sri Lankan citizens critical of the government were quick to point out that similar queues were seen when a host of other Chinese projects were opened; as on date these projects do not have a single serious investor. Given the Chinese track record in Sri Lanka, murmurs are getting louder on how much the ‘relationship’ with China has cost Sri Lanka. This comes at a time when everyone in the island nation is feeling the pinch of the economic downturn, which shows no signs of abating. Even the President’s January 18 address to parliament was high on rhetoric but did not lay down a workable plan that ordinary Sri Lankans were looking for.
The embattled President is trying all means to pass the blame to others. In one recent instance, NewsWireLK tweeted him as having said: “When I received 69 lakh votes [when he contested], don’t forget that 52 lakh voted against me [actually 55 lakh]. Their job is to criticise the work the government does.”
A cornered Gotabaya does not enjoy the luxury that his brother Mahinda or the Presidents before Mahinda Rajapaksa had of being able to blame every problem on the LTTE, specifically LTTE leader Velupillai Prabhakaran. With the obliteration of the LTTE and the killing of its chief, there is no one else left for the Sinhala rulers to blame.
Gotabaya Rajapaksa, the man who led the war against the LTTE, is now facing the fate of all COVID-era rulers: a bleak future.
Sri Lanka: Free speech under threat amid political turmoil
Published : April 07, 2022 17:03 ISTT+ T-
Sri Lankans have poured into the streets over the past few days demanding the resignation of President Rajapaksa. Photo: Dinuka Liyanawatte/REUTERS
Observers say free speech in Sri Lanka is at stake as the nation stares at a political and economic collapse.
Sri Lanka imposed a temporary nationwide social media blackout on April 3 as part of its efforts to contain public unrest triggered by the country’s worst economic crisis in decades. For a few hours, authorities restricted access to platforms including Twitter, Facebook, WhatsApp, YouTube and Instagram, as a state of emergency was declared amid the widespread protests. The suspension of the services was aimed at preventing protesters from organizing, but it was lifted just a few hours later as the move failed to prevent demonstrations.
President Gotabaya Rajapaksa’s government also revoked the state of emergency — which gave him sweeping powers to detain people and seize property — within days of imposing it, despite the political and economic turmoil gripping the island nation. Critics slammed the government’s decision to temporarily block access to social media. “We have to be ensured of unrestricted access to social media and communication platforms and be allowed to work freely and independently. This could well be the country’s Arab Spring moment,” Faraz Shauketaly, a prominent Sri Lankan journalist, told DW.
Nine years back, Shauketaly was shot by a group of unidentified men at his home near Colombo. He was at the time working for The Sunday Leader, a newspaper known for its critical reporting of the government. Dilrukshi Handunnetti, executive director of the Center for Investigative Reporting, said: “We have witnessed this troubling phase in the last 20 years of curtailing freedoms and arbitrary arrests. Public nervousness is visible.”
Steven Butler, Asia program coordinator at the Committee to Protect Journalists, called on the government to safeguard media freedom. “Sri Lanka must not use the state of emergency as a pretext to muzzle press freedom during this critical moment in the country’s history, when access to information is vital for all citizens,” he said in a statement.
Public anger running high
Skyrocketing inflation, weak government finances, ill-timed tax cuts and the COVID-19 pandemic, which have hurt the tourism industry and foreign remittances, have wreaked havoc upon the Sri Lankan economy over the past several months. The island nation is facing severe shortages of essentials, sharp price rises and crippling power cuts in what is viewed as the South Asian country’s most painful downturn since independence from Britain in 1948. The speaker of the country’s parliament warned on April 6 that the crippling economic crisis risks starvation across the island nation of about 22 million people.
Thousands of people have poured into the streets over the past few days demanding the resignation of President Rajapaksa, blaming him and his influential family — which has long dominated Sri Lankan politics — for the country’s economic meltdown. Crowds of protesters have even attempted to storm the homes of several government figures, including President Rajapaksa. Security forces have dispersed them with tear gas, water cannons and rubber bullets.
Rajapaksa struggles to tackle the crisis
Amid the mass protests, all government ministers offered their resignations on April 4, leaving just the president and his brother, Prime Minister Mahinda Rajapaksa, as the only members of the government who have not stepped down. In a sign of growing opposition, even 42 lawmakers from the ruling coalition announced that they will vote as independents, leaving the government with less than the 113 needed to maintain a simple majority in parliament.
The president is also struggling to assemble a new team to tackle the crisis. A new finance minister he appointed resigned within 24 hours of being sworn in. And opposition parties have repeatedly rejected his call for them to join a unity government to resolve the crisis, saying that they first want to see changes to the constitution that will restrict the president’s wide-ranging executive powers.
Despite the troubles, Gotabaya Rajapaksa hasn’t signaled any willingness to step down. On April 6, Chief Government Whip and Highways Minister Johnston Fernando said that the president will not resign. Colombo has instead sought help from India and China and has also requested financial assistance from the International Monetary Fund.
Journalists assaulted and detained
With public anger running high and the government trying to control the protests, reporting on the events from the site of demonstrations has become a challenge. Several journalists have been assaulted and at least six were taken into custody by police personnel from Sri Lanka’s Special Task Force (STF) on March 31, according to the International Federation of Journalists. They were covering an anti-government protest in a suburb of the capital Colombo.
“In a nutshell, I am profoundly concerned that the government will act with a very heavy hand at the first chance they get. The Rajapaksas aren’t known for their democratic credentials or light-touch,” Sanjana Hattutowa, editor at the online portal Groundviews, told DW. Ahilan Kadirgamar, senior lecturer at the University of Jaffna, said that any attempts at repression by the government are likely to only increase the determination of the protesting masses. “Much will depend on how the military responds to the current developments in the weeks ahead,” he said.