Sri Lanka’s Crisis Is Far from Over

Sri Lanka is currently undergoing a dual crisis, beginning with a full-blown economic crisis characterized by a depletion of foreign currency reserves and, consequently, an inability to pay for vital imports or service public debt. Moreover, shortages of essential commodities have triggered widespread protests against the Rajapaska family that dominates Sri Lankan politics, and sparked a broader political crisis in the country.

The International Monetary Fund (IMF) announced a preliminary agreement with Sri Lankan authorities on 1 September, promising to lend the country 2.9 billion US dollars to begin the long climb out of bankruptcy. But more money from foreign lenders will not eliminate the deeper, structural drivers of the crisis. While some of these drivers are of historical origin, many have to do with flawed state policies introduced over the past two decades.

The Colonial Roots of the Catastrophe

The economic crisis currently ravaging Sri Lanka is an outcome of structural weaknesses in the economy carried over from the colonial era, combined with external adversities and problematic economic policy decisions made by political leaders and their hand-picked bureaucrats at critical junctures since 2000.

Balance of payments (BOP) has been a problem for Sri Lanka for many years. Since the British period, Sri Lanka has depended on the export of a handful of primary goods — tea, rubber, and coconut — to earn the foreign currency needed for the import of essential goods such as food, vehicles, machinery, fertilizer, and agrochemicals. Although this import-export economy experienced some periods of boom, such as during the Korean War in the 1950s, in the long run it experienced BOP deficits due to marked price fluctuations for Sri Lanka’s exports and the net increase of import costs due to economic liberalization since 1977.

Sri Lanka partly offset the resulting imbalances by establishing an export-oriented apparel industry, developing tourism, and boosting remittances from Sri Lankans working overseas. Yet, foreign exchange difficulties continued to compel the government to borrow money from international lenders on grossly unfavourable terms.

The Foreign Debt Trap

Sri Lanka’s foreign debts are partly a product of the BOP difficulties described above. Yet its debt burden has increased sharply since 2000 due to a series of high-profile infrastructural development projects implemented with international financing. They include the Lotus Tower in Colombo, Hambantota Mahinda Rajapaksa Harbour, Mattala Rajapaksa International Airport, and the cricket stadium in Hambantota.

With political motivations overriding anticipated economic benefits, the last three projects were concentrated in Sri Lanka’s southern periphery, where the recently ousted Rajapaksa regime had consolidated its political stronghold. These projects added to the overall debt burden, some becoming liabilities in terms of having to pay back the loans at high interest rates while maintaining the facilities at high costs to the state, with inadequate returns on the investments themselves. All four infrastructural development projects are examples of loss-making enterprises built with foreign funds.

Sri Lanka traditionally relied on international donors such as the World Bank, the Asian Development Bank, or friendly bilateral donors such as Japan and the United Kingdom for development assistance. This began to change over the last two decades, with international financial markets and China emerging as important sources of development funds. For instance, all four projects mentioned above were built with Chinese funds.

The breakdown of Sri Lanka’s foreign debt liabilities up to 2020 indicates that nearly 40 percent of outstanding foreign debt is comprised of international sovereign bonds, while another 8 percent is owed to the Chinese Export-Import Bank. Chinese loans are often easier to obtain, but interest rates are higher (3.5 percent on average) compared to bilateral loans from Japan and India (less than 1 percent). Furthermore, in the case of Chinese loans, the maturity period was shorter (17 years on average) as compared to loans from Japan (35 years) and India (average of 25 years).

High interest rates and shorter repayment periods are features of the kind of high-risk commercial borrowing on international markets that characterizes the current debt crisis in Sri Lanka. The country’s debt stock rose from 97 percent of GDP in 2000 to 105 percent in 2021. As of December 2021, Sri Lanka’s external debt amounted to 51 billion US dollars against only 3.1 billion in total foreign reserves. The country’s external debt service ratio increased from 14.7 percent in 2000 to 30 percent in 2021.

It Isn’t Only about the Economy

Although Sri Lanka’s position on global markets was key, certain social and political disturbances in the country directly or indirectly contributed to the economic meltdown.

The war between the government and the Liberation Tigers of Tamil Eelam (LTTE) from 1983 to 2009 negatively impacted the economy. It spurred a collapse of agriculture and fishing (the main economic activities in northern and eastern Sri Lanka), damage to infrastructure, heavy brain drain particularly in the minority Tamil community, the development of a war economy characterized by large-scale recruitment to the security forces and high maintenance costs, and international borrowing to import arms and ammunition. Defence expenditures expanded rather than contracted after the end of war, making up an average of 11 percent of the budget throughout the post-war period. In addition, post-war reconstruction involved heavy public expenditure by the state, assisted by international donors.

Closer to the onset of the current economic crisis, the Easter Sunday terror attack by Islamist extremists on 21 April 2019 destabilized the political system and harmed the tourist industry that had begun to recover following the end of war. Several of the major tourist hotels in Colombo were targeted in the attacks, and tourist arrivals collapsed to an all-time low in 2019. This represented a major economic blow to the country, as tourism is a key earner of foreign currency and an important source of employment across the country’s tourism belt.

The pandemic that broke out in 2020 further impeded any early recovery for the industry. Moreover, the pandemic-related lockdowns and mobility restrictions affected all sectors, including tourism, construction, fishing and garments, transport, and other services. As a result, many people lost their livelihoods or experienced a marked decline in their incomes.

Some important political developments in the country, such as the rise of Sinhala Buddhist nationalism as the unwritten playbook of state policy, a concentration of political power in the hands of the executive presidency, and the rise of patronage politics — with family members and political supporters being handpicked for powerful government positions, undermining professionalism, checks and balances, and accountability — also contributed to the downturn.

Several policy decisions made by the new government formed by the Rajapaksa regime in November 2019 served to further accelerate the economic crisis. One was the decision to ban chemical fertilizer and all agrochemicals with effect from 27 April 2021. The move was presented as a remedy for the foreign exchange crisis as well as the spread of a new kind of chronic kidney disease that is popularly attributed to heavy agrochemical usage. Many experts objected to this policy, but the authorities refused to heed their advice.

Farmers held large protests against the fertilizer ban, as it affected their livelihoods and income. It also cut down foreign exchange earnings, as export income from tea dropped as a result of the fertilizer ban. The authorities were compelled to import rice, taxing limited foreign reserves due to the decreased rice production in the wake of the ban. In light of these negative outcomes, authorities removed the fertilizer ban in November 2021, but only after causing heavy damage to the economy.

There were also some important lapses in financial decision-making. The Sri Lankan rupee was pegged to the US dollar in May 2021. This move was intended to facilitate economic stabilization and prevent further depreciation of the rupee, possibly increasing the cost of living, but it also produced unwanted side-effects, such as overseas Sri Lankans opting to use alternatives to commercial banks when transferring funds, which in turn brought down the country’s foreign exchange income.

Several professional groups, including former employees of the Central Bank of Sri Lanka (CBSL), recommended floating the rupee against the dollar as a more appropriate strategy, but CBSL authorities dominated by political appointees did not listen. Here again, the decision was reversed after the economic crisis began, but the flow of remittances continued through informal channels.

Similarly, there were calls to seek IMF assistance from certain financial experts and opposition politicians in 2020, but the leaders of CBSL and the finance ministry argued against it by claiming that they wanted to go for a “home-grown solution” in line with perceived national interests. The authorities again reversed the decision in 2022 and approached the IMF for bridge financing and long-term credit, which was agreed upon in early September.

Bankruptcy Starts to Bite

With no foreign reserves to pay back foreign debt, Sri Lanka announced it would default on its international debt repayment on 12 April 2022.

The depletion of foreign reserves affected the import of essential commodities such as fuel, cooking gas, and medicines, and also paralyzed transport, electricity supply, and industry, as well as inconveniencing consumers in diverse ways. Commodity shortages led to long queues for fuel, cooking gas, and other supplies.

Sri Lanka’s monthly inflation rate jumped from 3 percent in January 2021 to 59 percent in May 2022 as an outcome of exchange rate revision, causing an unprecedented increase in the price of food, medicines, and other household necessities. This was a major blow to many consumers, who had already suffered other difficulties and declining incomes during the same period.

These developments also produced chain reactions in terms of transport breakdown, power cuts, the closure of schools and universities, and office closures, along with labour strikes which caused a halt in economic activities and social life throughout the country.

Since April 2022, daily scarcities of essential commodities and long queues for fuel and gas have been the most visible signs of the economic crisis. Media reports on the physical collapse and subsequent death of people lining up in queues for days without access to food or water have received a great deal of public attention.

Queues also became important sites of mass mobilization. After waiting long hours in queues, many people launched spontaneous protests. Barricading public roads with vehicles or LP gas cylinders became an important means of spontaneous public protest at the start of the crisis. Daily blackouts of up to 13 hours per day added to the unrest. Importantly, these hardships affected all sections of the population irrespective of their identity, income, or location. Each day the country was literally waiting for shipments to arrive from overseas, while ships waited in the harbour until payment was ensured. This fuelled an atmosphere of uncertainty across the supply chain.

Apart from shortages, unprecedented price rises for essential commodities upset the consumption pattern of many people simultaneously affected by livelihood disturbances and dwindling incomes. Some resorted to distress borrowing from money lenders, microfinance agencies, or banks, mortgaging jewellery and other assets. Many reduced the number of meals eaten per day. As the quantity and quality of food intake in lower-income groups suffered, children and pregnant mothers in particular were at high risk of malnutrition.

The government responded to the fuel crisis by rationing supplies, prioritizing employees in essential services, serving consumers on different days of the week according to their vehicle registration number, and the introduction of a QR code to supply a fixed quantity to each vehicle. These measures are currently being implemented with varying degrees of success in a supply chain controlled by the state and one Indian firm. However, a black market has already emerged with the participation of a mafia-like group formed by fuel station employees, law enforcement, three-wheel drivers, and local political actors. Those controlling it are likely to sabotage efforts to restore normal market mechanisms even after the current crisis subsides. There is also the risk of the black market expanding to other sectors including LP gas, medicines, and transport.

Sri Lankans have a long history of overseas migration for work and settlement. Economic reforms in 1977 opened up employment opportunities for men and women from low-income backgrounds in the Middle East, East Asia, and Italy. The economic crisis will reinforce this trend. Indeed, the Ministry of Labour and Foreign Employment actively promotes foreign employment as a remedy to the crisis.

Although foreign employment has been a mixed blessing for migrant workers, their families, and the children left behind overseas migration through both legal and illegal channels is likely to increase as an exit strategy during the crisis. The recent upsurge in long queues to obtain passports suggest that a new wave of outmigration is in the offing, while a surge of illegal migration from northern Sri Lanka to southern India has already been detected. Other possible destinations include Australia, Italy, and other countries in Europe.

Down with the Rajapaksa Regime

Since April 2022, a popular protest movement broadly known as aragalaya (meaning “people’s struggle”) has unfolded across Sri Lanka. The movement is characterized by a peaceful campaign for transparency, political accountability, mobilization against authoritarian rule, and ultimately system change.

Spearheaded by youth, the protests initially demanded the immediate resignation of President Gotabaya Rajapaksa, his older brother, Prime Minister Mahinda Rajapaksa, and three other immediate family members who held key cabinet positions in a regime steeped in entrenched nepotism as well as majoritarian Sinhala Buddhist nationalism, which it deploys to secure electoral success. The Rajapaksas rose to power in the presidential and parliamentary elections held in 2019 and 2020 on a platform advocating the interests of the ethnic majority.

The aragalaya began with a social media campaign highlighting hardships caused by scarcities during the Sinhala-Tamil new year holidays, Easter, and Ramadan. Anti-regime sentiments were reinforced by allegations of corruption and mismanagement against the political elite responsible for the crisis.

Born into an established political family in Sri Lanka’s Sinhala Buddhist deep south, the Rajapaksas have been are fierce advocates of majoritarian nationalism, and do not shy away from mobilizing the patriotic Buddhist sangha for indoctrinating the masses. As the Sinhalese comprise 74 percent of the total population, commitment to the Buddhist faith and majoritarian nationalism has worked in the Rajapaksas’ favour electorally.

Mahinda Rajapaksa mobilized this ideology during the war against the LTTE to motivate Sri Lankan soldiers, recruited largely from the Sinhala community. They achieved success by defeating the LTTE in 2009 in a bloody campaign that left a trail of human right violations. Thus, the hegemonic legitimacy of the Rajapaksa regime rested on a number of interwoven factors, with demography, Buddhism, a particular reading of history, popular support (“consent” in the Gramscian sense), the welfare state, and militarization reinforcing each other. The combined ideological alignment resulting from this situation can be referred to as a majoritarian ruling ideology.

Their majoritarian ideology enabled the Rajapaksas to stay in power continuously from 2005 to 2015, despite international human rights allegations against them. The Sri Lankan state turned to China to finance their image-boosting development projects. Their attempts to satisfy the electorate, however, were undermined by the rising cost of living, their failure to evenly distribute benefits of development, and rising ethnic tensions.

Maithripala Sirisena, who worked under Mahinda Rajapaksa until 2015, broke away from him and defeated him in the 2015 presidential election, forming successful coalitions with the pro-Western United National Party (UNP) and some minority parties. Initially, the new regime achieved a delicate balance between nationalist and neoliberal aspirations. President Sirisena took steps to handover some land acquired by the military from minority communities and establish an office for missing persons, but his regime faced serious internal problems. Finally, the Easter attack was proved to be a fatal blow to the good governance regime, enabling the Rajapaksas to rekindle nationalist sentiment and win the elections held in 2019 and 2020.

Neoliberal market reform, tourism, and foreign investment have remained part of Sri Lanka’s policy package since 1977. Allegiance to a neoliberal agenda, however, was diluted by the heavy state intervention in economic activity and services. The security forces built up during the war remained loyal to the Rajapaksas. They did not abandon neoliberal policy, but rather sought to calibrate it in line with majoritarian nationalism. With their ambivalent relationship with the West, the Rajapaksas turned to China and, to a lesser extent, India for development assistance and COVID-19 vaccines. It was against this backdrop that the aragalaya uprising began.

Uprising in Colombo

By late March, the anti-Rajapaksa mobilizations had transformed from a social media campaign into street protests demanding the government’s resignation. Candlelight vigils held in Colombo’s middle-class neighbourhoods peacefully protested against power cuts and the hardships imposed upon the public. The street protests gathered momentum as public frustrations over scarcities and hardships intensified.

The next wave started on the night of 31 March, when masses of people abandoned fuel and gas queues to congregate near the presidential residence in Mirihana, a suburb of Colombo, and shout anti-Rajapaksa slogans. These protests began peacefully, but became violent when the police used tear gas to halt protesters who tried to break through police barriers. The crowd dispersed, but similar actions broke out in front of other politicians’ residences in the following days.

Social media posts called on Sri Lankans to gather in agreed-upon locations on 3 April to demand regime change. The state responded by declaring a state of emergency and imposing an island-wide curfew, but it failed to deter the protesters from taking to the streets. The entire cabinet resigned the next day, and only four ministers minus many of the Rajapaksas were reinstated to make way for a unity government — which failed, however, as the opposition parties refused to join the government. The emergency and curfew were lifted the same day.

On 8 April, liberal-minded young people launched Occupy Galle Face on Galle Face Green, an open space in Colombo overlooking the Indian ocean, beachfront hotels, and the Presidential Secretariat. Participants held up placards with various slogans targeting the Rajapaksa regime. “Gota-Go-Home”, calling for the immediate resignation of the president, became the central slogan. The protestors renamed part of Galle Face “GotaGoVillage” (gotagogama or “GGG”) and occupied it continuously, sleeping in tents at night. GGG soon became the central hub of aragalaya.

The protestors came from diverse backgrounds including liberal groups like the Black Cap movement, the radical Interuniversity Student Federation (popularly known as Anthare), youth wings of some established left-wing political parties like the Socialist Frontline Party (also called Peratugami) and Janatha Vimukthir Peramuna. These peaceful protests were backed by professional associations of lawyers and academics, certain trade unions, artists, and some religious leaders. There were no designated aragalaya leaders, in a deliberate move to avoid state repression.

As in Occupy protests around the world, the encampment facilitated bonds of solidarity and collective action. Protestors agreed to avoid narrow party politics (nirpakshika) in the interest of their common struggle. The protests continued unabated for over four months despite various interventions by the state. Often, the space was transformed into a platform for agitation, with live music, street theatre, and a popular form of interactive folk songs called virindu, recited to the beat of roban drums.

The widely publicized visits to GGG by leading social activists, artists, movie stars, and popular athletes granted further legitimacy to aragalaya. Food, water, and snacks were supplied by diverse well-wishers, including some figures from the corporate establishment. A community kitchen, medical tent, legal aid, audio-visual facilities, and a library were established on site. Mobile toilets, tents, and a temporary water supply were set up by agencies supportive of the protests.

Aragalaya was open to men and women, participants from different ethnic and religious groups, and socially ostracized communities like LGBT people and substance users. A deliberate effort was made to highlight and celebrate diversity against the monolithic majoritarian hegemony of the Sri Lankan state.

The activists utilized social media to raise awareness, creating a common platform for diverse groups and using the economic crisis as a rallying point. Differences and tensions nevertheless surfaced from time to time and were carefully mediated within the larger group. The GGG protests were peaceful, with a distinctly “expressive and performative” dimension. They were clearly sensitive to possible infiltration and sabotage by rival groups. When Prime Minister Mahinda Rajapaksa offered to discuss with the protesters, they promptly refused, insisting on the resignation of all Rajapaksas.

Weeks after GGG was established, another protest camp was established in front of Temple Trees, the official residence of the prime minister, known as Mynahgogama (MGG). The protests also spread to provincial towns like Kandy, Galle, Matara, and Anuradhapura. All media outlets gave widespread publicity to aragalaya.

Against this backdrop, a pro-government rally in Temple Trees organized by Mahinda Rajapaksa and his supporters on 9 May 2022 triggered a violent attack on aragalaya, with the police failing to stop what was essentially mob violence. As the pro-government rally ended, riled-up participants attacked protestors with sticks and torched their tents in a deliberate move to intimidate and break up the movement.

This shows the extent to which violence is used by sections of the political elite to silence protest and resistance. The attack on aragalaya backfired, however, as supporters from nearby low-income neighbourhoods gathered in GGG to protect the protestors and launched a counterattack against the pro-government mobs The prime minister and his allies were widely blamed for inciting mob violence, compelling him to resign and escape from Temple Trees in the early hours of the following day. This propelled another wave of anti-government violence that same night, ending in politicians’ houses being set on fire and the killing of a ruling party MP and his security guard.

A few days later, Ranil Wickremasinghe was appointed prime minister, but political instability continued and the cabinet was reconstituted three times within one month. Anti-government protests continued unabated, despite the resignation of Mahinda Rajapaksa.

On 9 July, protestors from all over Sri Lanka converged in Colombo and stormed the president’s official residence. The protesters overcame roadblocks erected by the security forces and entered the heavily guarded presidential mansion, compelling the president and his wife to flee the country and submit his resignation. In the meantime, parliament elected Wickremasinghe president.

The aragalaya protestors celebrated the resignation of Gotabaya, but soon redirected their campaign against the new president, identifying him as another member of the ruling clique and a contributor to the crisis. They also questioned his legitimacy, as his party had been completely wiped out in the previous general election.

Immediately after his election, the new president declared a state of emergency and ordered the security forces to clear the presidential secretariat of protestors, arresting some movement leaders in a clear attempt to repress the movement and thereby going against his earlier public statements supporting their struggle.

Protestors gradually abandoned GGG and other encampments, but their protests continued in political platforms and social media. Going against his earlier pronouncements, as new president Wickremesinghe launched a campaign of oppression targeting aragalaya leaders, resorting to the draconian Prevention of Terrorism Act to keep some of the key leaders under arrest for long periods without charging them with a crime. In turn, aragalaya activities subsided as activists concentrated on securing the release of the arrested leaders and protesting state repression of dissent.

The uprising’s inclusive character and respect for diversity enhanced its attraction for many people. While most protests were peaceful, several turned violent when provoked by pro-government actors. The absence of a unified organization and a common programme approved by its membership, however, remain barriers to further success.

Charting a Way Forward

In the current situation, the IMF bailout is the only international credit line open to Sri Lanka. Following a wild goose chase for so-called “home-grown solutions”, the government began seeking IMF assistance in May 2022. In response to Sri Lanka’s request, the IMF proposed possible assistance under the Extended Fund Facility (EFF).

In order to restore macroeconomic stability and debt sustainability, the IMF called for a series of measures, including restoring fiscal sustainability while protecting vulnerable groups in society, ensuring the credibility of monetary policy and exchange rate regimes, preserving the stability of the financial sector, strengthening governance, and introducing mechanisms to eliminate corruption.

After the first round of discussions with the IMF, Sri Lanka hired leading firms Lazard and Clifford Chance LLP to support its external debt restructuring . In addition, the Sri Lankan government approved hiring a debt restructuring rating recognition agent and a communication agent to launch the debt restructuring programme.

However, the country must satisfy certain conditions to be eligible for the IMF loans. Sri Lanka must address long-standing economic weaknesses within a sound macroeconomic policy framework that is yet to be developed. The government is currently renegotiating its debts with Sri Lanka’s bilateral creditors, including China and Japan, and multilaterals like ADB and the World Bank. After establishing an IMF credit line, the country is expected to stabilize its economy by lowering inflation, resolving the BOP and exchange rate crises, and putting forth a recovery plan.

The IMF has now reached a staff-level agreement with Sri Lankan government for an EFF arrangement. However, it has not been presented to the public or even tabled in parliament, despite the demand for its submission put forward by many parliamentarians. In the meantime, certain austerity measures such as the removal of state subsidies for fuel imports, tax reforms such as raising VAT and lowering the retirement age in the public sector from 62 to 60 years, have already been implemented — imposing further hardships on the wider public. 

Preoccupied with regime change, aragalaya did not pay attention to IMF austerity measures and their possible repercussions on the public. Certain proposed measures, such as improved governance and eliminating corruption, resonate with some key aragalaya demands. However, measures such as privatization of some 40 loss-making state enterprises, public sector lay-offs, and cuts to public spending could trigger further protests, particularly from the trade unions currently allied with aragalaya.

The new president’s U-turn towards repression may be pre-empted by his concern for preventing further protests destabilizing the state and ongoing negotiations with the IMF. However, this is a rather short-sighted policy that can potentially harm peace and stability in the country, along with its economic recovery.

In light of all these factors, political negotiations with the protestors, including their possible engagement in governance, would certainly be more advisable than the ongoing state repression targeting aragalaya leaders. While the IMF calls for political stability as a prerequisite for funding, some proposed interventions may exacerbate political instability if not accompanied by measures designed to address the grievances expressed by the movement, such as government accountability, concentration of power, and limited opportunities for democratic participation.

At the same time, greater sensitivity is necessary on the part of the IMF to the specificity of Sri Lanka in matters such as geopolitics and a commitment to welfare state policies such as free health care and free education while addressing chronic inefficiencies, widespread malpractices, resource constraints, and developmental hurdles in the system. In other words, what is needed is neither a strait jacket neoliberal agenda nor an inward-looking nationalist formula, but a set of innovative interventions that unlocks Sri Lanka’s developmental potential and satisfies broad-based demands for social justice, enhanced democratic participation, and improved governance.