Sri Lanka: Implosion in the making

The LTTE was vanquished, but a series of blunders by governments mostly run by the Rajapaksa family since 2009 led to the ruinous economic situation.
Image used for representational purpose only. (Express illustrations)
Image used for representational purpose only. (Express illustrations)

Being an old time Operation Pawan warrior, I instantly relate to any news from or about Sri Lanka. Over the last three months one has been observing the misery brought on its people by the Sri Lankan political leadership, no doubt one which is elected by the people and placed on a pedestal, at a certain point in time. Currently, with the streets turning violent and the mobs revelling in a Bastille-like storming of the residences of the President and Prime Minister, there is a complete breakdown in law and order with virtually no governance in place, more importantly with no future course charted out. How did it come to this?

Sri Lanka has witnessed a free fall over the last three years but the commencement of this started many years ago. The Rajapaksa family, which till recently had the ignominious honour of being one of the world’s most powerful political families with involvement of a large number of family members in the government, has largely overseen the affairs of the state since 2005.

In 2009 Mahinda Rajapaksa, as President, to put an end to the raging insurgency-cum-terror which the Liberation Tigers for Tamil Eelam (LTTE) adopted for their separatist minority cause, launched his forces to hunt down the LTTE in the north and the east, in a near-conventional mode military campaign. Much of the credit for the eventual success went to younger brother Gotabaya Rajapaksa who as a former officer of the Sri Lankan Army became the Defence Secretary and led the campaign allegedly throwing human rights to the winds. The LTTE was vanquished but the Sri Lankan government did not follow this up with a pragmatic peace process for the Tamil areas hit by separatism. Since 2009 successive governments, mostly run by the Rajapaksa family, made a series of blunders which led to the ruinous economic situation. The Hambantota port and the Mattala Rajapaksa airport constructed with loans from China at a cost of over $2 billion became white elephants with almost zero utility.

Gotabaya became President in late 2019 just after the April 2019 Easter bombings by the Islamic State which hugely affected one of the main sources of income for the government – tourism. With tourism down 50 percent, the Coronavirus pandemic hit the nation in early 2020. Astute financial managers may have taken pragmatic measures to overcome the challenge but neither Gotabaya nor his brother Basil Rajapaksa, the Finance Minister, knew much about economics.
The Sri Lankan government lived well beyond its means for quite long. It has been to the IMF 16 times before.

Currently its $51 billion foreign debt can no longer be managed. India relies considerably on the Colombo port for global trade given it is a trans-shipment hub. Sixty per cent of India’s trans-shipment cargo is handled by the port. India-linked cargo also accounts for 70% of the port’s total trans-shipment volume. A meltdown in economic terms is bad enough; it gets compounded by the lack of scope of recovery due to the simultaneous socio-political and economic issues. After the 2019 election, Gotabaya drastically cut taxes as a populist measure.

The Government's revenue base fell dramatically. In 2021, on the basis of amateur advice, he banned imports of chemical fertilizers which are the backbone of modern farming. Instead, he wanted Sri Lanka to be the first pure organic farming nation. Production of rice (domestic demand) and tea (export earner) crops collapsed creating a food and forex crisis. The government printed money to prop up the Sri Lankan rupee -- this was inflationary and when removed the rupee went from 205/US$ to 370/US$. Imports collapsed. Gulf remittances fell as workers held on to their money in the Gulf in hope of further weakening of the rupee. International rating agencies downgraded Sri Lanka’s credit ratings from 2020 onwards, eventually locking the country out of international financial markets.

Gotabaya refused to go to the IMF for assistance when Sri Lanka was still a solvent state. His government believed that tourism would bounce back with the pandemic receding in intensity. Now it’s negotiating with the IMF as a bankrupt state. The terms will obviously be much harsher.

It costs a whopping Rs 15000 in Indian currency for a round trip from Colombo city centre to the airport. That is the effect of insufficient fuel and unavailability of the same to consumers. With foreign exchange reserves down to just $1.5 billion, there is little scope for import unless India steps in and releases some reserves for which Sri Lanka cannot pay. It’s also the medical field which is most affected as there is insufficient money to import medicines and medical equipment. Cancer treatments and major surgeries have been postponed with nothing in sight. The problem is accentuated by the fact that the IMF which is now negotiating various proposals is not quite confident who it is dealing with. In an economic crisis of this proportion, stability at the political centre of power is a necessity. No international financial institution would wish to throw in money to a set of incompetent and clueless leaders with no assurances that the terms and conditions laid down will be adhered to.

The IMF will require privatisation of the state airline, petroleum and power companies and other such state institutions. It will want a tax increase, reduction of bureaucracy and of the army too. This won’t be easy. JP Morgan analysts estimate the country’s gross debt servicing would amount to $7 billion this year, with the current account deficit coming in around $3 billion. The IMF won’t tolerate capital intensive and unnecessary projects and will look towards maximum disinvestment by the government while it disburses loans for the recovery process.

The interim period between the current collapse and the point from which recovery could start is a period of intense challenge. No foreign investor will step in until the economy has bottomed out because no one wishes to be caught in the downward spiral where losses are for sure. It's this period which will also see maximum social unrest. When resources are minimal, a weak government in place and with ethnic and religious cleavages in society, the feasibility of violence increases. This will prevent the commencement of the recovery process and infusion of confidence of foreign investors to step in.
For India there is no other alternative but to be ready with anything it can do in the social and economic domains. Politically it’s a hot potato and whatever India does must have full internal political consensus.

Lt Gen Syed Ata Hasnain (Retd)
Former Commander, Srinagar-based 15 Corps. Now Chancellor, Central University of Kashmir

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