If ever there was a recipe for political and economic disaster, Sri Lanka had all the right ingredients. By some social indicators, the country appears a success story. Within South Asia, Sri Lanka has some of the highest levels of social development including the highest life expectancy, literacy rate, and lowest maternal/infant mortality rate. On the other hand, three decades of civil war, massive amounts of foreign debt, nationalistic sentiment, and poor policy decisions have destabilized the island. A constitutional crisis in 2018, terror attacks in 2019, and COVID-19 only helped accelerate the current crisis.
Understanding how Sri Lanka arrived at its current state of turmoil requires an understanding of the Rajapaksa family dynasty and how it has shaped the country’s political environment. Oversimplifying Sri Lanka’s troubles not only does a disservice to a complex situation, but is dangerous for those who think the state may be an outlier when it comes to economic woes.
WHAT CAUSED THE CRISIS?
Although not an exhaustive list, there are three main factors that have caused Sri Lanka’s current crisis: debt and inflation, tax cuts and decreased revenue, and a failure in organic farming.
Debt and Inflation
At the forefront of the discussion is Sri Lanka’s failure to repay its massive foreign debts. In mid-April 2022 the government defaulted on all its external debt. Many have been quick to assign blame to Chinese “debt trap diplomacy.” However, Sri Lanka’s default goes well beyond China. The country is seeking to restructure around $50 billion of its foreign debts, 47% of which come from market borrowing, with the rest owed to the Asian Development Bank (13%), China, (10%), Japan (10%), World Bank (9%), and India (2%).
Sri Lanka’s default harmed its economic reputation by weakening its currency and making future loans more inaccessible while worsening inflation. The near collapse of the Sri Lanka rupee and historic levels of inflation meant the government couldn’t pay for imports. Prices for daily necessities including fuel, medicine, and food skyrocketed. The government had to ban non-essential sales of fuel and close schools. Meanwhile, residents had to queue for hours in the hopes of getting limited essential supplies.
Tax Cuts and Decreased Revenue
Sri Lanka’s inability to repay its debts is directly tied to its lack of revenue. Prior to 2019, Sri Lanka already had declining tax revenue. Yet, President Gotabaya Rajapaksa instituted some of the country’s largest tax cuts in history in 2019. Revenue went down, creditors became increasingly anxious about Sri Lanka’s ability to repay its debt, and the state began relying on the Central Bank to finance its budget deficit.
Despite decreased revenue and higher interest rates, Sri Lanka continued to borrow heavily and repay at higher interest rates. When it became clear that Sri Lanka would struggle to repay its loans, rather than negotiate with creditors Sri Lanka insisted it would meet its repayment schedule. It did not. Alongside the problem of reduced tax revenue, Sri Lanka was also dealing with the aftermath of other reduced revenue streams, specifically tourism and remittances.
Oversimplifying Sri Lanka’s troubles not only does a disservice to a complex situation, but is dangerous for those who think the state may be an outlier when it comes to economic woes.
The COVID pandemic challenged even the strongest economies, but countries relying on tourism and remittance revenues were especially vulnerable. Sri Lanka benefitted from both of these, with 12% of the GDP attributed to tourism and 8% to remittances. The tourism industry in Sri Lanka struggled immensely following the 2019 Easter attacks that killed 250 people, including foreigners, and injured over 500. Tourist arrivals initially plunged by 70% in the following months but started to recover around the same time the World Health Organization declared a global pandemic and Sri Lanka closed its borders to tourists. The travel ban lasted for a year and a half with foreign tourist arrivals slowly resuming in late 2021. By early 2022, Sri Lanka’s tourism numbers returned to some of their highest levels. Even as the country plunged into crisis and experienced widescale protests, tourists continued to arrive well into spring 2022. By May 2022, however, the numbers had dropped by half, from a high of 106,000 arrivals in March to 30,000 by May.
Sri Lanka appeared to be an initial success story for the flow of remittances during the pandemic. Even as worker migration decreased by nearly 60% in 2020, Sri Lanka had some of its highest remittance amounts during the pandemic, with an overall growth of nearly 6% in 2021 by mid-2021. Despite the initial success, remittances dropped to a 10-year low by the second half of 2021 and continued the downward trend into 2022. Analysts contributed the drop to a feedback effect of the growing financial crisis.
Organic Farming Failure
Of all the policy failures attributed to the Rajapaksa regime, the organic farming failure deserves special mention. During his 2019 campaign, Rajapaksa promised a transition into organic agriculture over the next 10 years. While the benefits and shortcomings of organic agriculture have been debated extensively elsewhere, the Sri Lanka experiment was nothing short of disastrous.
Non-organic fertilizers were banned with limited notice and the abrupt transition quickly backfired. Within months, rice production fell by 20%. Sri Lanka, historically self-reliant on rice, had to import the staple crop from India. Neighboring countries and the World Food Program also began sending aid as the country began facing shortages. Sri Lanka’s other staple crop and primary export, tea, was also devastated. The government partially lifted the ban by November 2021, but by that point, the crisis was already spiraling further.
THE REGIONAL IMPACT
Sri Lanka’s neighbors have been closely watching the volatile situation unfold. The Maldives, 1000 km to the west, received international attention after Rajapaksa’s fled there. Gotabaya’s stay in the Maldives was short though as he continued onward to Singapore, which has a significant population of Tamils. Singapore has said Rajapaksa has only been granted a short-term visa and cabinet spokesman Bandula Gunawardena reported that Rajapaksa will return to Sri Lanka soon. It is unclear what will happen next but Rajapaksa will likely want protection from extradition and war crimes prosecution. Although Singapore restricts public dissent, many Singaporean Tamils still voiced their concern about allowing Rajapaksa in the country at all.
India has been the largest contributor of aid to the island nation, donating $3.8 billion in aid. India says this is part of its “neighborhood first” policy and has been quick to dispel rumors about any involvement in Sri Lanka’s internal political affairs. India is in a key position to help rebuild Sri Lanka moving forward, but given the complex history between the two, it is unclear how much India will intervene beyond providing aid. Ultimately, a stable Sri Lanka is in India’s interest.
Meanwhile, China has been more subdued in its response. Prior to the financial crisis, many worried China’s investments in Sri Lanka may escalate tensions between India and China, whose tensions have been increasing ever since a deadly clash in 2020. China, however, has commended India’s aid to Sri Lanka while limiting its own response, seemingly taking a “wait and see” approach. It’s too soon to know what the long-term geostrategic consequences will be and what impact they will have on India-China-Sri Lanka relations. Sri Lanka remains in a highly vulnerable position that will require years of recovery.
Sri Lanka’s crisis can provide several lessons to the world. For one, the collapse of the Rajapaksa regime demonstrates the dangers of relying on name recognition, family dynasties, and divisive ethno-nationalistic sentiment. When it comes to governance, these do not provide stability or sound decision-making. Rajapaksa successfully campaigned for president using a hardline and divisive approach. The allegations of war crimes against Tamil civilians in the final days of the civil war did not appear to harm his support among the Sinhalese electorate. Neither did his reliance on Islamophobic rhetoric.
Following the end of the civil war, Sri Lanka had an opportunity to establish a more inclusive government and stronger democratic institutions. While at times it appeared the country was moving in that direction, Sinhalese Buddhist nationalism became an even more powerful force. Once again Sri Lanka will have an opportunity to redefine itself.
For many Sri Lankans, the July 20 election of Ranil Wickremesinghe as president doesn’t reflect much change, as many consider the long-term member of the government a Rajapaksa ally. To transform Sri Lanka and gain the confidence of its citizens, several things must happen. First, Wickremesinghe will have to make bold decisions, such as following through on his promise to limit the power of the presidency. Initial reports of attacks on protestors and journalists by security forces are a worrying sign. Second, the opposition forces in Sri Lanka must work to effectively organize and provide the country with a viable alternative that respects human rights and democratic institutions. Finally, the international community, particularly financial lenders and institutions, must not abandon Sri Lanka, or else Sri Lanka risks further collapse.
The stakes are very high, but with it comes the opportunity for substantive change.
Andrea Malji is an Assistant Professor of International Studies at Hawaii Pacific University and a 2021 Fulbright-Nehru Scholar at the University of Kerala. Her research focuses on nationalism, religion, political violence, and South Asia.