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Bankruptcy is Not Sri Lanka’s Only ‘Difficulty’

Bankruptcy is Not Sri Lanka’s Only ‘Difficulty’
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Ranil Wickremesinghe

Ranil Wickremesinghe

Prime Minister of Sri Lanka

“We are now participating in the negotiations as a bankrupt country. Therefore, we have to face a more difficult and complicated situation.”


On July 9, thousands of protesters stormed the presidential palace in Sri Lanka’s capital, Colombo, demanding President Gotabaya Rajapaksa’s resignation, while his nation is facing the worst financial crisis since its independence from Britain in 1948. President Rajapaksa was escorted by his guard to safety and said he will resign on July 13.

Sri Lanka, an island of 22 million people off the southern tip of the Indian subcontinent, has defaulted on its debts, and its government has been trying to chart out a plan to fix the failing economy that will win it International Monetary Fund (IMF) funding for the next four years and restructure its $50 billion debt to foreign creditors.

Meanwhile, Sri Lanka's Prime Minister Ranil Wickremesinghe blamed the country's bankruptcy for the difficult negotiations with the IMF.

“We are now participating in the negotiations as a bankrupt country. Therefore, we have to face a more difficult and complicated situation,” Wickremesinghe said on July 5.

That is misleading. Mismanagement and corruption are the main reasons why the country’s economy has failed.

In fact, the IMF has called on Sri Lanka to “reduce corruption vulnerabilities” to save its economy.

In June, Sri Lanka’s inflation rate reached 54.6% while food inflation hit 80.1%, forcing Sri Lankan families to cut back on meals, Reuters reported. The country announced a two-week halt of all sales of fuel except for essential services, such as health care.

The economic meltdown led to nationwide rallies against mismanagement and rampant corruption.

Protesters and critics blame the government, mainly the ruling Rajapaksa family dynasty, for the country’s economic crisis.

The Rajapaksa family rose to power in 2005 when Mahinda Rajapakse, then prime minister, won the presidential elections. After his win, he appointed his brother, Gotabaya Rajapaksa, a former army officer who was living in the U.S., as defense minister.

Together, they launched a military campaign against the Tamil Tigers, a separatist organization that had been fighting for independence of the Tamil minority in northern Sri Lanka since the 1970s. The Tamil Tigers had agreed to drop their demands for independence in return for greater autonomy under a Norway-brokered effort backed by the United Nations and the United States.

But in 2009, the Rajapaksas decided to crush the rebels, extinguishing hopes for a peaceful end to the conflict, in which more than 100,000 people have died amid accusations of grave human rights violations by both sides.

Maithripala Sirisena defeated Mahinda Rajapaksa in the 2015 presidential elections and appointed Ranil Wickremesinghe as prime minister. But the Rajapaksa family returned to power when Gotabaya Rajapaksa won the presidency in 2019. In forming a new Cabinet, Gotabaya swore in his brother, former President Mahinda Rajapaksa, as prime minister. Mahinda was also named head of the finance, urban development and Buddhist affairs ministries.

The new president also tapped his brother Chamal Rajapaksa to head the irrigation, internal security, home affairs and disaster management ministries, and two nephews to head the high-tech agriculture, youth and sports ministries. A year later, a fourth brother, Basil Rajapaksa, was appointed as minister of finance.

The Rajapaksa family’s hold on the government “concentrated power to the point that the country came to resemble an autocratic family business, accountable to no one until it pushed the nation to bankruptcy,” Britain’s The Guardian newspaper said.

While Sri Lanka’s economic problems predate the Rajapaksas’ reign, they began “rampantly borrowing, first to pay for Sri Lanka’s three-decade civil war against Tamil minority separatists, which was brought to a brutal end in 2009, then for a ‘super-growth’ development spree of roads, airports, stadiums and power grids,” The Guardian wrote. “… [A]ll the Rajapaksas became mired in accusations of vast-scale corruption, from bribes to money laundering.”

The government borrowed large sums from China for projects like a deep-sea port in Hambantota district, but the projects stalled and debt accumulated between 2010 and 2020, Bloomberg News reported.

The COVID-19 pandemic made things worse, hitting Sri Lanka’s tourism-reliant economy and remittances from overseas workers.

“To stay afloat, the government printed money, boosting supply by 42% between December 2019 and August 2021 — helping to stoke what would become Asia’s fastest inflation,” Bloomberg News said.

During his presidential campaign, Gotabaya Rajapaksa promised unprecedented tax cuts, prompting a warning from former Finance Minister Mangala Samaraweera that such a move might lead the country to bankruptcy. Gotabaya Rajapaksa ignored that warning, and the country was hit by severe fuel and food shortages.

In April 2021, the government banned fertilizers to fulfill a campaign promise to support organic farming and fight fertilizer mafias. But the ban backfired, leading to crop failure and the need to increase food imports.

“The paddy harvest failed, forcing the government to import rice and start an expensive food aid program to support devastated farmers. Export earnings from tea, a key revenue source, also dried up,” Bloomberg News reported.

In May, Sri Lanka defaulted on its debt for the first time in its history.

That same month, the protests turned violent after a group of government supporters attacked protesters in Columbo, killing eight and injuring 200.

Rajapaksa’s Cabinet resigned and the prime minister stepped down in May, and the president’s support base is dwindling. His appointment of veteran politician and ally Ranil Wickremesinghe as prime minister did not win over the angry protesters.

The crisis in Sri Lanka is compounded by Russia’s war in Ukraine, as Moscow continues to block Ukranian grain exports, mainly to countries across Africa and the Middle East reliant on grain imports, The Straits Times reported.

Sri Lanka imports 45% of its wheat from Russia and Ukraine, and more than half of its soybeans, sunflower oil and seeds, and peas from Ukraine.

“Unless the Ukraine crisis is not solved immediately, the fuel and commodity prices can rally further. The inflationary pressure in the Western markets, especially in Europe due to high energy prices and supply chain bottlenecks, may reduce consumers' purchasing power, lowering the demand for goods exported by Sri Lanka,” said the Institute of Policy Studies of Sri Lanka think tank.

On July 10, U.S. Secretary of State Antony Blinken said Russia’s restrictions on grains exports might contributed to the turmoil in Sri Lanka, and voiced concern that other crises might follow.

"We're seeing the impact of this Russian aggression playing out everywhere. It may have contributed to the situation in Sri Lanka; we're concerned about the implications around the world," Blinken said.

On June 6, President Gotabaya Rajapaksa called Russian President Vladimir Putin, asking for Russia “to provide credit support to assist Sri Lanka to solve its dire fuel import issue.”

The Kremlin said in a statement that “mutual disposition to further progressive development of traditionally friendly Russian-Sri Lankan ties was confirmed.”

Sri Lanka is also negotiating with China to restructure $6.5 billion in debt.