Why Sri Lanka nose-dived into a full-blown economic crisis? 

Illustration by Madan Nepali/Breaknlinks

Srilankan politics is going downhill. The Srilankan policy has become highly polarized along ethnic and religious lines in the last few decades. It is more evident in the previous presidential election held in November 2019. A vast majority of Muslims and Tamils, for different reasons, voted against the candidate fielded by the Sri Lanka Podujana Peramuna (SLPP), which was primarily supported by the Sinhala Buddhist forces. It was openly admitted by the newly elected president Gotabaya Rajapaksa himself, and it was the first time after independence that a cabinet was formed without a single Muslim member.

A virulent anti-muslim campaign was carried out by the politicized extremist Sinhala Buddist groups before the presidential election to maximize the Sinhala votes, which they achieved. Consequently, at the present moment, some ministers openly claim in public forums that they want to form the new government without the support of 'fundamentalists and extremists' referring to the Muslim political parties. 

Sri Lanka's presidential elections concluded with former wartime defense secretary Gotabaya Rajapaksa securing more than 52 percent of the vote. As Sri Lanka's new president, he has risen to the highest office in the island-state. While there has been jubilation in much of the Sinhala south, Tamils and Muslims across the northeast fear that the return of a Rajapaksa regime means further rights abuses.

As results were announced late on Saturday in 2020, a familiar pattern emerged, with politics split along ethnic lines, which has become the norm in Sri Lanka. In the predominantly Tamil north-east, voter turnout was the highest on record since presidential polls were first held in 1982. The United National Party's (UNP) Sajith Premadasa, Mr. Rajapaksa's leading rival, had a resounding majority in those areas, garnering more than 80 percent of the vote in Tamil areas and reducing Mr. Rajapaksa's support to as little as 5 percent in some districts.

The Sinhala south, however, showed markedly different results. Gotabaya Rajapaksa, who, like his older brother and former president Mahinda, espouses a particularly virulent form of nationalist politics and ran a campaign on a hardcore Sinhala nationalist platform, secured much of the Sinhala heartland. He reiterated his commitment to Sri Lanka's "unitary" nature – a nod to his party's resistance to the devolution of powers to the island's Tamil provinces. He also vowed to protect Sri Lankan soldiers accused of war crimes, with his manifesto stating he would free those accused of rights abuses and end "foreign interference" on the island.

In the wake of the Eastern Sunday Attacks that claimed 269 lives earlier this year, his pledge to bolster the already massive Sri Lankan military also had particular appeal. Mr. Rajapaksa repeatedly pointed to the current government's failure to prevent the attacks to cement support for his national security agenda. With a Sri Lankan parliamentary select committee report that security forces might have allowed the attack to "create chaos and instill fear" ahead of presidential elections, Mr. Rajapaksa's strongman approach ensured he won widespread support.

As Mr. Rajapaksa begins his five-year term, there has been increased speculation that his older brother Mahinda, now constitutionally prevented from becoming president, could be installed as Prime Minister. Last year, a constitutional crisis saw him briefly occupy that position, and with Mr. Rajapaksa now president, the path seems to have been cleared for him to take up the role.

Other members of the Rajapaksa clan, who also held senior cabinet roles under previous regimes, including brothers Basil and Chamal and Mahinda's son Namal, also featured heavily in the presidential campaign. They all now stand poised to be appointed to key government positions. With the Rajapaksas firmly back in power at the highest levels of the Sri Lankan state, a familiar fear has returned to the northeast.

President Gotabaya Rajapaksa took early retirement from the army and moved into information technology before immigrating to the United States in 1998. He returned to Sri Lanka in 2005 to assist his brother in his presidential campaign and was appointed Defence Secretary in his brother's administration. During his tenure, the Sri Lankan Armed Forces successfully concluded the Sri Lankan Civil War, defeating the Tamil Tigers and killing its leader Velupillai Prabhakaran in 2009. He was a target of an assassination attempt in December 2006 by a Tamil Tiger suicide bomber. Following the war, Rajapaksa initiated many urban development projects. He stepped down following the defeat of his brother in the 2015 Presidential Election.

In 2018, he emerged as a possible candidate for the 2019 presidential election, which he successfully contested on a pro-nationalistic, economic development, and national security platform. He is the first person with a military background to be elected president of Sri Lanka and the first person to be elected president who had not held an elected office prior. 

In outlining his plan to the parliament, the newly inaugurated president called for constitutional reform to centralize the government under a more assertive executive. Such changes, however, required the support of two-thirds of the parliament. Legislative elections were held in August 2020. Because the government's promises of prosperity and security had gained credibility through its successful handling of the initial wave of the COVID-19 pandemic, the SLPP almost won the two-thirds majority needed to implement Rajapaksa's agenda. The parliament took up amendments to the constitution in the months that followed.
Rajapaksa's second year as president proved less fortunate. In May 2021, he banned the importation of synthetic fertilizers and pesticides but gave little warning to farmers. The result was a steep decline in crop production and a run on the market, so the ban was lifted in November.

Meanwhile, the number of COVID-19 infections surged in May—and again in August—to rates far higher than any witnessed in 2020. In July, the appointment of Gotabaya's brother Basil to the Ministry of Finance drew attention to the growing concentration of government administration in the hands of the Rajapaksa family. Concerns over the government deficit mounted, exacerbated by a decline in revenue from a tax cut implemented before the pandemic and a slump in gross domestic product during the pandemic.

He also appointed his brother Mahinda Rajapaksa as prime minister again in 2021. He served as President of Sri Lanka from 2005 to 2015, as Leader of Opposition from 2002 to 2004 and 2018 to 2019, and as Minister of finance from 2005 to 2015 and from 2019 to 2021. He has been the Member of Parliament (MP) for Kurungela since 2015.

On October 26, 2018, Rajapaksa was appointed to the Prime Minister's office by President Maithripala Sirisena after the United People's Freedom Alliance withdrew from the unity government. The incumbent, Ranil Wickremesinghe, refused to accept his dismissal, stating that it was unconstitutional. This disagreement resulted in a constitutional crisis. The Sri Lankan Parliament passed two no-confident motions against Rajapaksa on 14 and 16 November 2018. Failing to follow proper procedures, President Sirisena rejected both. On December 3, 2018, a court suspended Rajapaksa's powers as Prime Minister, ruling that his cabinet could not function until establishing its legitimacy.

Later, he also appointed his brother Chamal Rajapaksa as a member of parliament in the agriculture sector as a minister of agriculture. 

As per the year 2021, Namal Rajapaksa is appointed as sports minister in the parliamentary house of Sri Lanka by his brother, the President of Srilanka Gotabaya Rajapaksa. 

'-Beginning of the economic downturn-'

Since 2010, Sri Lanka has witnessed a sharp rise in foreign debt, reaching 88% of the country's GDP in 2019. The onset of the COVID-19 pandemic-induced global recession accelerated the crisis, and by 2021, the foreign debt rose to 101% of the nation's GDP, causing an economic problem. Several protests were staged by the political opposition demanding the current administration solve the financial crisis and immediately resign in the wake of the broader economic situation.

The incumbent Government of Sri Lanka under president Gotabaya Rajapaksa made continuous cascading policy errors, resulting in a severe substantial economic crisis for Sri Lanka. 

In 2021, the Sri Lankan government officially declared the worst economic crisis in the country in 73 years. 

Despite commentaries blaming China for the debt crisis, the Australian Lowy institute pointed out that Sri Lanka was "not engulfed in a Chinese debt trap" because external debt owed to China was only about 10% of the debt stock in April 2021. Instead, most of Sri Lanka's external debt stock is owed to international capital markets, which accounted for 47%. Another 22% is held by multilateral development banks, followed by Japan having 10% of Sri Lankan external debt. 

The crisis included significant tax cuts that affected government revenue and fiscal policies, causing budget deficits to soar from 5% in 2020 to 15% in 2022. To cover government spending, the Central Bank began printing money in record amounts, ignoring advice by the International Monetary Fund (IMF) to stop printing money and instead hike interest rates and raise taxes while cutting spending, as well as another IMF warning that continuing money printing would lead to an economic implosion. This resulted in social unrest and protests due to the rise in the cost of living and drove Sri Lanka to the brink of bankruptcy due to foreign reserves falling to US$2.3 billion as of March 2022, this being insufficient to pay the foreign debt obligations of US $7 billion and an International Sovereign Bond (ISB) payment of US$1 billion for the year 2022. According to the National Consumer Price Index, the national inflation rate increased to 17.5% in February 2022.

Despite the heavy toll of the COVID-19 pandemic on Sri Lanka's economy and the lives of its people, the economy was supposed to recover in 2021, though challenges remain, says the World Bank. 

The Update includes a special focus section, which discusses the impact of COVID-19 on poverty. With jobs lost and earnings reduced, especially in urban areas and among private-sector employees and informal workers, the $3.20 poverty rate is projected to have increased from 9.2 percent in 2019 to 11.7 percent in 2020. 

The report provides an update on Sri Lanka's economy and outlook, highlighting the devastating impact of the pandemic. As is the case in many countries fighting the pandemic, Sri Lanka's economy contracted by 3.6 percent in 2020, the worst growth performance on record.

The government acted decisively with steps such as cash transfers and postponed tax payments. The Central Bank's introduction of a debt moratorium and other measures to encourage lending also helped reduce the adverse impact of COVID-19 on businesses and livelihoods. At the same time, increased expenditures and lower revenues amid the pandemic contributed to a deterioration of the fiscal situation. Public and publicly guaranteed debt has risen to 109.7 percent of GDP. Reserves declined to an 11-year low in February 2021, and the exchange rate depreciated by 6.5 percent from January through March 17, 2021. Striking a balance between supporting the economy amid COVID-19 and ensuring fiscal sustainability remains a key challenge.

According to the data for 2021 until 2022, the External debt of Sri Lanka has averaged 47244.74 USD Million, reaching an all-time high of 55915.96 USD Million in the fourth quarter of 2019 and a record low of 37098.10 USD million. Previously in 2020, the debt of Sri Lanka was 51117.43 USD million, and now 2022, the debt which Sri Lanka owes to other countries is 50724.21 USD million. This data is given or compared by the External debt of the country. External debt is part of the total debt owed to creditors outside the country. This data is a report of Srilankan Total Gross Debt which is up to date from 2012 to 2022. 

Publish : 2022-04-03 16:17:00

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