Months of protests in Sri Lanka over soaring inflation, shortages of food and fuel and lengthy power cuts have toppled the government in the South Asian nation and led to its first sovereign debt default since gaining independence from Britain in 1948. The political turmoil—and sporadic outbreaks of violence—were complicating efforts to manage the island’s foreign exchange crisis and secure more funds to keep its tourism-reliant economy running, having already been hit hard by the Covid-19 pandemic.
The crisis started in late 2019, when the newly elected President Gotabaya Rajapaksa carried out populist tax cuts, reducing revenues just months before the pandemic devastated the economy, with international flights grounded and successive lockdowns ordered. Remittances from overseas Sri Lankan workers dried up as well as many lost their jobs. Though Sri Lanka has received credit lines from neighbours like India, it was unable to regularly pay for imports of fuel and essential foods. Making matters worse was Rajapaksa’s pivot in 2021 to organic farming with a ban on chemical fertilizers that triggered farmer protests and saw production of critical tea and rice crops decline. Consequently, the Sri Lankan President declared an economic emergency to contain rising food prices, a depreciating currency, and rapidly depleting forex reserves. The lack of foreign currency, coupled with the overnight ban on chemical fertilisers and pesticides, has sent food prices soaring.
The Easter bomb blasts of April 2019 in churches in Colombo resulting in 253 casualties, consequently, dropped the number of tourists sharply leading to a decline in foreign exchange reserves. Rajapaksa in 2019 promised lower tax rates and wide-ranging Standard Operating Procedures for farmers during their campaign. The quick implementation of these promises further exacerbated the problem. The Covid-19 pandemic in 2020 impacted exports of tea, rubber, spices, garments and the tourism sector. China’s Debt Trap Policy played a significant role in economic instability in Sri Lanka. The Crisis in Sri Lanka is triggered due to a shortage of foreign exchange (forex) reserves, which have dropped by 70% over the last two years to just USD 2 billion by the end of February 2022.
The $81 billion economy is close to bankruptcy, with Russia’s invasion of Ukraine raising global prices for oil and other commodities. Sri Lanka abruptly restricted fuel supplies in late June 2022 and encouraged people to stay home. The authorities have raised interest rates, devalued the currency and curbed non-essential imports. But with a meager $2 billion in foreign exchange reserves—and $7 billion in debt payments due this year—restoring the country’s economic health is an uphill battle.
With foreign-exchange earnings plunging, Sri Lanka struggled to manage its external debt, which had grown in part due to loans from China to fund ambitious infrastructure projects. Policy makers flagged to creditors that Sri Lanka wouldn’t be able to make payments until its debt was restructured, and it was therefore in pre-emptive default. A group representing Sri Lanka’s creditors was set up to conduct restructuring talks.
To understand the politico-constitutional crisis, it is important to comprehend the background of events that began in late 2014. Current President Pallewatte Gamaralalage Maithripala Yapa Sirisena was the General Secretary of Sri Lanka Freedom Party (SLFP) and also Minister of Health in Rajapaksa government. He fell apart with President Rajapaksa and decided to contest presidential elections with the support of the United National Party (UNP) led by Ranil Wickremasinghe and some of his own party (SLFP) supporters.
Since, 2015, a total of 56 changes were brought to the Constitution. Apart from amending the existing Constitution, Sirisena government presented a plan for a new constitution aimed at devolving power in January 2016. As per the plan, the government promised to strengthen democratic rights, promote national reconciliation, guarantee fundamental rights and freedoms that assure human dignity, promote responsible and accountable government, and respect the rule of law. Moving further, the Right to Information Act was passed by Parliament in 2016 to give right for people to access the information of affairs of several organs and institutions of the government, but subject to certain restrictions. This move was in response to widespread demand and expectation on a transparent and accountable government, especially pertaining to public projects.
On the ethnic question, both President Sirisena and Prime Minister Wickremasinghe by and large agreed on reversing excesses committed by the previous regime, international commitments on human rights, long-term political settlement and reconciliation. Yet, Sirisena could not ignore opposition arising from Sinhala hardliners and Buddhist Sangha. That’s perhaps the reason why they have to reiterate giving foremost place to Buddhism in the new constitution as well.
There is a danger in using brute force and bringing the military to the forefront. Sri Lanka is a fragile society rife with ethno-religious tensions from its past bloody insurrections and civil war. The short term use of force could snowball into a full-fledged social agitation. Public anger could grow rampant and further prolong the political-economic stability. Finally, given its military past, Sri Lanka could quickly move toward a military state closer to the Myanmar model. The regime has used the national security and Prevention of Terrorism Act (PTA) as a pretext to justify its suppression and the use of force.
Sri Lanka is facing a clear “Arab Spring” moment triggered to overthrow the autocratic rule, highlighting the rampant corruption and rising poverty. Protests at the President’s house and Galle Face had a ripple effect on the entire island. The government labelling the protesters as extremists and the police shooting in Rabukkana and attacking peaceful protestors at the protest site have only aggravated the situation. Hundreds of lawyers are appearing on behalf of the protesters. The regime’s immediate family members and financiers are fleeing the country as their properties are being burnt down.
The political uncertainty raises more questions about discussions with the International Monetary Fund on a rescue plan. The then-Finance Minister Ali Sabry told Parliament in May 2022 that any IMF program would take as long as six months to start. He also said it may take two years for the country to emerge from the crisis. The Rajapaksa government had been deeply reluctant to ask for IMF help since it can involve unpopular austerity measures. It also has been seeking aid from India.
The crisis in Sri Lanka will definitely have an economic and political impact on other countries, especially India and China. From the economic perspective, Sri Lanka’s share in India’s total exports has declined from 2.16% in FY15 to just 1.3 per cent in FY22. Automotive firms like Tata Motors and TVS Motors have stopped exports of vehicle kits to Sri Lanka and halted production at their Sri Lankan assembly units due to its unstable forex reserves and fuel shortages. And from the political perspective, whenever a political or social crisis has occurred in Sri Lanka, India has witnessed a large influx of ethnic Tamil community refugees from the Sinhala Land to India through the Palk Strait and Gulf of Munnar. However, India may find it difficult to handle such an influx and needs a robust policy in place to handle the crisis. The state of Tamil Nadu has already started feeling the impact of the crisis with the reported arrival of 16 persons from Sri Lanka through illegal means.
Given the scale of Chinese involvement in economic projects in Colombo over the years, much more was expected from Beijing to help Sri Lanka overcome its economic crisis. However, China was circumspect and non-committal to Colombo’s request for debt restructuring in January 2022, prompting the Gotabaya administration to reach out to New Delhi. China has taken a conservative approach in being at the forefront of distributing aid to Colombo due to the Covid-19 pandemic and the impact on its economy. If Beijing comes to Colombo’s rescue and provides bailout, other countries that have endorsed the Belt and Road Initiative (BRI) that are facing economic troubles may ask for similar assistance.
Helping Sri Lanka in its crisis will be of India’s interest. Sri Lanka has been a strategically important partner for India. India can make use of this opportunity to balance its diplomatic ties with Sri Lanka, which have been distant owing to Sri Lanka’s proximity with China. As the disagreement between Sri Lanka and China intensified on the fertiliser issue, India’s fertiliser delivery to Sri Lanka on the latter’s request is seen as a positive development in the bilateral relations. Extending diplomatic ties with Sri Lanka will ease India’s effort to keep the Sri Lankan archipelago out of China’s “string of pearls’ game in the Indo-Pacific.
Most crucially, the impact of the crisis on India-Sri Lanka bilateral relations cannot be ignored. India’s infrastructure projects and ethnic reconciliation has taken a jolt due to the crisis. Former President Mahinda Rajapaksa is known for his pro-China leanings and anti-reconciliation stance.
At this juncture, India has to patiently work for broad consensus both at societal and political levels on the ethnic issue. Without an island-wide consensus any settlement of the ethnic issue is doomed to be a failure. On the infrastructure projects, New Delhi need not to worry too much about China’s presence. India has been doing its best in helping out Sri Lanka’s socio-economic development for several years. There is neither profit motive nor strategic angle to India’s assistance to its neighbours.
Dr S. Krishnan is an Associate Professor in Seedling School of Law and Governance, Jaipur National University, Jaipur.