How Sri Lanka entered the crisis

An anti-government protester yells at supporters of the ruling Sri Lankan party during the clash between the two groups amid the country’s economic crisis in Colombo, Sri Lanka on May 9, 2022. (Reuters / Dinuka Liyanawatte)

The Sri Lankan economic crisis has turned into deadly violence. Eight people died and over 200 were injured on Monday, the country’s powerful prime minister resigned and his brother, the president, is looking for ways out of the chaos.

Anti-government protesters angered by blackouts, shortages of basic necessities and price hikes are demanding that President Gotabaya Rajapaksa resign, but the retired military officer has called for emergency powers in an effort to maintain control.

The violence and political chaos gripping the 22 million island nation comes 13 years after a brutal civil war ended in a bloody epilogue in which tens of thousands of people were killed.

India, Sri Lanka’s northern neighbor, has lent billions of dollars to help the country pay for vital supplies.

China, which has invested heavily in infrastructure projects in what analysts say is an attempt to extend its influence across Asia in recent years, has intervened less publicly, but has said it supports the island nation’s efforts to restructure. your debt.

Sri Lanka’s vital negotiations with the International Monetary Fund (IMF) on a bailout, as well as plans to restructure its sovereign debt, could be thrown into chaos.

How did this come about?

Analysts say economic mismanagement by successive governments has weakened Sri Lanka’s public finances, leaving national spending in excess of its income and producing marketable goods and services at inadequate levels.

The situation was exacerbated by the deep tax cuts implemented by the Rajapaksa government soon after he took office in 2019. Months later, the COVID-19 pandemic struck.

This wiped out much of Sri Lanka’s revenue, particularly from the lucrative tourism sector, while remittances from citizens working abroad fell and were further weakened by an inflexible exchange rate.

Rating agencies, worried about the government’s finances and its inability to pay off its large external debt, downgraded Sri Lanka’s credit ratings from 2020 onwards, eventually blocking the country from international financial markets.

To keep the economy afloat, the government relied heavily on its foreign exchange reserves, eroding them by more than 70% in two years.

What has the government done?

Despite the rapid deterioration of the economic environment, the Rajapaksa government initially suspended talks with the IMF.

For months, opposition leaders and some financial experts have been urging the government to act, but it has held its position, hoping that tourism will recover and remittances will recover.

Eventually, aware of the scale of the brewing crisis, the government sought help from countries including India and China, regional superpowers that have traditionally fought for influence on the strategically located island.

In all, New Delhi claims to have provided support worth over $ 3.5 billion this year.

In early 2022, President Rajapaksa asked China to restructure repayments of approximately $ 3.5 billion in debt to Beijing, which also provided Sri Lanka with a $ 1.5 billion-denominated swap at the end of 2021. yuan.

Sri Lanka eventually opened talks with the IMF.

Despite outside support, fuel shortages caused long queues at gas stations and frequent blackouts, and some crucial drugs ran out.

What happens next?

President Rajapaksa sought the support of all political parties in parliament to form a unity government, an offer that many, including allies of the ruling alliance, have rejected.

On Monday, Prime Minister Mahinda Rajapaksa, the president’s older brother, wrote in his resignation letter that he would step down so that an interim government of all parties could be formed.

The president plans to meet with opposition politicians with the expectation of forming a new government within days, according to a cabinet spokesman.

But thousands of protesters, some of whom have been camping out on the streets for weeks singing “Gota (baya) go home”, so they want the president to step down.

Pro and anti-government protesters clashed Monday in the commercial capital Colombo in an escalation of violence, and homes and cars were set ablaze in other parts of the country.

Some economic groups in Sri Lanka rely on the country’s politicians to quickly find a solution.

In a statement on Tuesday, the Joint Apparel Association Forum, which represents Sri Lanka’s vital apparel industry, said it was “critical” for a new government to take the lead.

– Reporting of Devjyot Ghoshal; Editing by Mike Collett-White and Alexandra Hudson