SRI LANKANS BRACE FOR COLLAPSE

After a brutal civil war in Sri Lanka, a combination of government hubris and a terrible run of luck has sent the economy into a tailspin. James Griffiths reports

Country’s lack of functional government, including a President who refuses to step down, looks to prolong instability for months to come

Sri Lanka could have held on if the tourists had kept coming. The island country is in the midst of an economic collapse, with billions of dollars owed to foreign lenders and shortages of everything from food to fertilizer. Fuel has all but run out, and the currency is heading into free fall.

For years, economists had been warning about Sri Lanka’s ballooning foreign debt, as successive governments borrowed to pump money into infrastructure. But officials waved off the doomsayers, convinced this was the only path to growth and emboldened by growing tourist numbers. Sri Lanka appeared poised to become the next hot Asian destination after decades of civil war kept foreigners away.

Then came a perfect storm of crises – an almost unbelievable spell of bad luck that, combined with sometimes staggering mismanagement by the government of President Gotabaya Rajapaksa, has brought the country to the brink.

“We’ve got an economy collapsing with no functional government in place,” said Fung Siu, an analyst covering Sri Lanka for the Economist Intelligence Unit. “We’re looking at prolonged instability and months of real economic hardship for the population.”

Mr. Rajapaksa was brought to power in the wake of terrorist attacks in early 2019 that killed hundreds of people – including many foreign tourists – and shook the economy, forcing an already indebted Colombo to launch a fiscal stimulus it could ill afford but couldn’t shy away from.

Tourism might have recovered, but then COVID-19 struck, and one of Sri Lanka’s biggest sources of foreign currency was suddenly gone. Remittances from Sri Lankans working overseas also fell as expats had less money to send home.

This year, the war in Ukraine sent energy prices shooting up just as Sri Lanka was hit by a drought. Crop yields were down significantly, worsened by a since-reversed government decision – announced and implemented almost overnight – to ban chemical fertilizers, and importing food was suddenly becoming more and more expensive.

Other moves by Mr. Rajapaksa’s administration, including slashing taxes, putting off talks with the International Monetary Fund until the last possible moment, and failing to maintain reserves of fuel and food, have only compounded problems that would have tested any leader.

“We have a crisis of governance,” said Paikiasothy Saravanamuttu, executive director of the Colombo-based Centre for Policy Alternatives. He added that while previous administrations are also at fault for the current situation, “this government has come to epitomize the drawbacks of the system, and the Rajapaksas’ greed and basic incompetence have made them the issue. So they have to go for us to change the system.”

For weeks now, protesters have been demanding Mr. Rajapaksa’s resignation, but he has refused to budge, sacrificing instead his brother, Prime Minister Mahinda Rajapaksa, who was replaced this month by opposition leader Ranil Wickremesinghe.

Demonstrators have been met with extreme force. The army has been given permission to shoot “law breakers” on sight, and strict curfews have been put in place. Riots have rocked Colombo and other cities, though at least some of the violence appears to have been caused by progovernment mobs attacking peaceful protesters.

“Sri Lanka is a highly militarized state. This is a government that has consistently used violence,” said Niro Kandasamy, a lecturer in history at the University of Sydney, pointing to the civil war and accusations of war crimes against the Tamil minority. “One of the things that is quite startling to see, however, is the use of that violence against the majority Sinhalese population.”

Mr. Wickremesinghe is attempting to put together a unity government, one that can negotiate with foreign lenders, primarily the IMF, but it’s unlikely the public will tolerate any deal that keeps Mr. Rajapaksa in power.

“You’ve got a battle of wills at the moment, protesters insisting that Rajapaksa has got to go, and Rajapaksa digging his heels in,” Ms. Siu said. “Having a unity government is his way of buying time.”

If he does not go willingly, any process to remove him, such as impeachment, will take months. The next election is not scheduled until 2025, though the president can bring it forward to 2023.

India has advanced some emergency financing, but any real rescue package can only come from the IMF, and “they’re not going to distribute any of those funds unless there’s a functioning government,” Ms. Siu said.

Another major factor in all of this is China. Over the past two decades, Beijing has pumped billions of dollars into Sri Lanka, and while China accounts for just 10 per cent or so of Sri Lanka’s foreign debts – about the same as Japan – it was seen by some in Colombo as a more likely rescuer than other players. Mr. Rajapaksa’s government appears to have delayed going to the IMF out of an assumption that Beijing would bail it out.

“China did not come forward as Sri Lanka expected,” said Chulanee Attanayake, a research fellow at the National University of Singapore who specializes in Beijing’s policies in South Asia.

Both through the Belt and Road Initiative and other deals, Beijing has lent billions of dollars to small countries around the world in recent years and does not want to send the message that debts can be easily restructured in times of crisis, let alone written off.

Nevertheless, Dr. Attanayake said, Beijing will likely come through, or at least agree to a wider restructuring package, so as not to lose any influence to rivals Japan and India.

But Beijing, too, will require at least a semblance of stability before it opens its chequebook. So in the short term, Sri Lankans may be largely on their own.

In a speech Monday, Mr. Wickremesinghe warned that “the next couple of months will be the most difficult ones of our lives.”