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'It will get worse before it gets better': Sri Lanka's economy may take months to stabilise, warn experts

Millions are struggling as the island nation grapples to restructure its debts and procure funds

Rasika Fonseka, father of three teenage boys has been a model parent and citizen. A manager at a small restaurant by day, and an Uber driver by night, he has been working hard to take care of his family and his ailing mother. But of late, because he lost both jobs, he has taken to the streets, participating in the peaceful protests to oust his country’s president.

On Thursday evening, Fonseka was caught in one of these protests that turned violent outside President Gotabaya Rajapaksa’s residence, when police used force against the protestors. As hundreds of hoarse and angry protestors shouted “Gota go home!” while setting fire to a military bus outside the president’s residence, Fonseka was one of the many beaten up by the police, who deployed tear gas and water cannons to disperse the protestors.

The chant “Gota go home”, one of the more civil ones directed towards the president of Sri Lanka, echoed by 5,000 more protestors who thronged the streets on Thursday night, has been resonating around the island nation the past month after Sri Lanka’s economy took a nose-dive.

In what is said to be the worst economic crisis since the nation’s independence from the British in 1948, Sri Lankans now line up in queues, which sometimes run up to two or three kilometres, for gas, fuel and other essentials.

Imported medicines are unavailable, including for hypertension. Two weeks ago, surgeries were suspended in hospitals due to shortage of drugs used for anaesthesia, and dental clinics do not have basic equipment for simple procedures. On Saturday, the ministry of education announced that school principals “have been allowed to decide to bring in students for only term examinations,” due to unavailability of diesel, while the end of term examinations have been cancelled in most schools as cash-strapped Sri Lanka could not print paper.

“We are hungry, fed up and scared,” said quiet-spoken Fonseka, who lost his day job as the manager of the restaurant that closed down due to rising food prices and unavailability of gas, and his income as an Uber driver due to the diesel shortage in the country. “I am not a man to come out to the streets to protest. My boys go to a good school, and participating in violent protests is not an example I want to set for them. But we need to do something. I don’t know how to feed my family, let alone send my boys to school and buy medication for my mother. I just don’t see a future.”

The peaceful protest that erupted into riots outside the president’s house was different to the ones in Sri Lanka’s bloody past. This time, people from all walks of life, religions and backgrounds participated, asking the president to quit. Placards in Sinhala, English and Tamil were displayed by people who have been denied basic goods and services, including milk powder, rice, flour, fuel and electricity in the import dependent nation.

The last straw, though, was the government announcing a 13-hour power cut last week to a nation that was already suffering from blackouts for a month and at the brink of desperation. Local media reported that during the month of March alone, more than 1,000 small restaurants went out of business.

What caused the crisis?

Following the Thursday nights riots, the Rajapaksa government swiftly imposed curfew and placed the state under emergency law. President Rajapaksa issued the gazette under the Public Security Ordinance, which gives him power to make regulations “in the interests of public security, the protection of public order and the maintenance of supplies and services essential to the life of the community”.

Under the emergency regulations, the president can authorise arrests and detentions without warrants, taking possession of any property and search any premises. He can also change or suspend any law.

On Saturday evening, the government placed the country under another 36 hours of curfew, which opposition parties and the general public say is a bid to stop the nation-wide protest that was scheduled for Sunday.

Despite the curfew, hundreds of protestors rallied in the Independence Square in central Colombo on Sunday after the government blocked all social media.

As the protestors chanted “Gota go home,” once more, opposition leader Sajith Premadasa asked the military to allow the march go ahead.

“People can’t live like this… this curfew has been imposed to save Rajapaksa from public anger. Let them go ahead,” he asked.

Public anger this time, though, emanates from the entire general public, not just the minorities who have suffered at the hands of the Rajapaksas. In his presidential acceptance speech, Rajapaksa claimed he was voted into office by “the Sinhalese majority votes,” who represent 70 per cent of the country’s population.

The president and his brother Mahinda Rajapaksa, current prime minister and former president, have been accused of war crimes during the country’s three-decades-long bloody civil war and later, for inciting racial hatred and human rights violations against the Muslim and Christian minorities.

“The anger stems from the realisation that the Rajapaksas have played us all out. They have used us in their divide and rule policy, stolen from us, ruined our country and now we, nor our children, have a future. All the Rajapaksas have to go,” said Minasha Ratnayake, a teacher at an international school, who was at the Thursday rally.

The Sri Lankan government is entirely controlled by the Rajapaksas. The Rajapaksa clan holds nine commercial ministries in central cabinet and seven top cabinet posts. While Gotabaya Rajapaksa holds rank as president, the Prime Minister is his elder brother and former president Mahinda Rajapaksa. The finance minister is his third brother Basil Rajapaksa, while the eldest of the Rajapaksa siblings, Chamal Rajapaksa is the country’s current Foreign Minister. The list does not end here. Namal Rajapaksa, the eldest son of the Prime Minister is Minister of Youth and Sports and State Minister of Digital Technology and Enterprise Development, while his second son Yoshitha Rajapaksa is his Chief of Staff. As more core Rajapaksa family members dot the arena, 75 per cent of Sri Lanka’s budget remains in the hand of this dynasty.

According to analysts and economists, the dark debts of Sri Lanka began even before the Rajapaksas. “Every government that has come into power has treated the people as voters and therefore provided handouts of one kind or another and as a consequence have also enriched themselves,” explained Pakiasothy Saravanamuttu, head of Colombo based independent think tank, Centre for Policy Alternatives. “The net result being that we have spent far more than we have earned and therefore we have created deficits as a consequence.”

However, among Sri Lanka’s past corrupt governments, the Rajapaksa regime tops the list. During the presidency of Mahinda Rajapaksa, which ended in 2015, the Rajapaksa clan began consolidating their fortune.

In 2007, Mahinda Rajapaksa, the then strongman president took an important policy decision to borrow. Government bonds were sold in capital markets. Fifteen years later, that borrowing continues, and today, these loans account for about 38 per cent of Sri Lanka’s debt. The loans did not come cheap, and they came from Rajapaksas’ ally China, who had a vested interest in the island nation that lies strategically across from India.

During Mahinda Rajapaksa’s presidency, China was involved in 70 per cent of all new infrastructure projects in Sri Lanka, lending the government at least $14 billion during the period, much of which, the public acknowledges, lined the pockets of the Rajapaksa family.

“The Rajapaksas’ particular crime is that they looked to the Chinese to provide them protections against war crimes and human rights allegations (post war). They also got money from the Chinese for vanity projects and infrastructure projects. Now we couldn’t repay the loan, because we don’t have the foreign exchange,” said Saravanamuttu. Currently China accounts for about 10 per cent of Sri Lanka's $35 billion foreign debt.

In 2019, soon after current president Gotabaya Rajapaksa came into power, he made some ill-timed policy decisions. He introduced tax cuts, including slashing the Value Added Tax by half, and the government began printing more money leading to higher inflation.

“There was vested interest behind the tax cuts by the Rajapaksas,” Umesh Moramudali, an economist with the University of Colombo, told Khaleej Times. “It was a very egoistic and politically motivated decision and made no sense at the time, especially considering that Sri Lanka already had one of the lowest tax rates in the world.”

Soon after President Rajapaksa’s tax revisions, the pandemic affected Sri Lanka, with the island nation losing approximately $4 billion from its tourism industry, the country’s main source of income.

With Covid 19, it became impossible for Sri Lanka to borrow from international markets and the government kept using its reserves of about $7.5 billion to meet the country’s import needs as well as pay back mammoth loans.

As economists pushed for an International Monetary Fund (IMF) bailout, President Rajapaksa refused to acknowledge the magnitude of the problem and opted for short term options including loans from China and India.

While the Sri Lankan rupee started slide, President Rajapaksa made another ill-fated decision last year, against the advice of advisors – to impose a complete ban on imported fertilisers, causing a severe food shortage in the country. Further, the lack of foreign currency that led to the government’s inability to pay for fuel, led to a fuel crisis in Sri Lanka long before global fuel shortage following Russia’s invasion of Ukraine.

Despite food costs rising more than 500 per cent, the year-end exams being cancelled due to paper shortage and the power crisis plunging the country into darkness, the government consistently ignored pleas by economists and think tanks to seek IMF assistance.

The crunch came when the government had enough foreign reserves only to pay back loans, or import essentials including food, medicine and fuel for its people by seeking assistance from the IMF. The government decided to pay back the loans.

“The government’s unwillingness to pay to the IMF, but wanting to pay back the sovereign bonds, and as a consequence we don’t have the foreign exchange to provide the basic essentials for the people. Now, that fuels the speculation that they are involved in the bond scam. That they are making money too out of the bonds,” said Saravanamuttu.

Where does Sri Lanka go from here?

Last month, President Rajapaksa finally conceded and announced that he was exploring working with the IMF and a possible bailout by the Washington-based institution.

“We must take action to fill this deficit and increase our foreign exchange reserves. To this end, we have initiated discussions with international financial institutions as well as with our friendly countries regarding repayment of our loan instalments,” Rajapaksa said two weeks ago.

Last week, the IMF spokesperson Gerry Rice told reporters: “The Sri Lankan authorities have expressed interest in an IMF-supported financial program.”

Experts, however, say the move comes far too late and the IMF is not a “magic wand.”

As Sri Lanka now grapples with restructuring debt, coming to agreement with creditors to pay over longer periods of time, procuring funds as well as clearance from the IMF to access international markets for finance, economists and think tanks warn that the move has come far too late and the IMF is “not a magic wand.”

Experts predict that current food, fuel and power crises will plague the nation at least for another two to three months before Sri Lanka reaches stabilisation; and at least another six before “any sign of normalcy returns.”

“There is pain that needs to be endured. It will get worse before it gets better,” said Saravanamuttu.

At the other end on Saturday evening, individual men and women from all professions, in trishaws and luxury vehicles tooting their horns, and families with children as young as four with their masks strolled on, flagrantly breaching the curfew, braving the military with their AK47 rifles, and cried out “Gota Go Home!”