Review of Sri Lanka Crisis and the Way Forward
Dr Anil Kumar

Since its independence in 1948, Sri Lanka faced its worst economic crisis in the year 2022. Initially, in 2022, the country was facing Omicron, a variant of Covid19, followed by deep political and economic distress throughout the year. Economic distress clearly appeared at the end of the first quarter of 2022, when the country ran out of fuel, immediately after the Ukraine crisis. Arguably, the economic and the ensuing political crises was a result of the government’s policies as well as the havoc wreaked by the pandemic. The situation, particularly the economic crisis, forced Sri Lanka to cut its expenditure and seek help from agencies like International Monetary Fund (IMF), World Bank (WB), Asian Development Bank (ADB) and other countries like China, India and many others.[1] After IMF ruled out the proposal for grants, Sri Lanka sought $1 billion in support from India and requested China to review their debt. But things went out of the control of the government, especially when protesters asking for the resignation of the president, who declared an emergency and fled, spread in the country. When President Gotabaya resigned and left the country in April, parliamentarians elected Ranil Wickremesinghe as the new President. After becoming the President, Wickremesinghe pledged to restore the political order vis-à-vis the economy and instructed the Sri Lankan military to do whatever requisite for peace.[2]

Protests and Politics

The lack of food, fuel, medicine, and other necessities, along with debt and inflation, emerged as a crisis-invoking burden for the nation. Nevertheless, the Sri Lankan government constantly engaging with multiple agencies like IMF and World Bank. In the similar vein, the government has also appointed committees to negotiate with friendly nations for funds.[3] However, the economic crisis looming large in the country strained everyday life, especially after inflation, when they ran out of fuel. In fact, three to five kilometers of lines for fuel, shortage of food and half of the time in a day power cuts made life worse. All of these problems emerged due to the economic crisis, which forced the people of Sri Lanka to occupy streets in March and April, for a movement called ‘Aragalaya’.[4] It was a nation-wide movement of the people against the Rajapaksa led government, particularly against the government’s policies and decisions that led the country into trouble. The mass movements forced the leadership, including President, Prime Minister and the Cabinet, to resign from the posts.

After a couple of months of protests and the resignation of the Prime Minister and President, Members of Parliaments elected Ranil Wickremesinghe as Sri Lanka’s new President. On becoming the president, Wickremesinghe asked for support from the people to focus on stability, not disruption. He said that there should not be more ‘Aragalaya’, and if it happens, then he will use the security forces to prevent any such move in the country.[5] However, the people continued movements demanding a fresh election that can be costly. Therefore, the Wickremesinghe-led government is still facing many security challenges, both on the political and economic fronts. On political fronts, the significant challenges are; managing political turmoil, public opinion, ethnic inclusion and reconciliation, holding on to power and ensuring stability.[6]

President Wickremesinghe focussed on the process of stabilizing the economy, without going to elections because two more years were impending. Even though, he was able to manage the chaos created by the protesters, Wickremesinghe asked security forces to arrest people as well as political leaders involved in organizing strikes. He cracked down on the protests with the use of forces that dismantled the process of gathering or any kind of movement creating chaos in the country.[7] However, “small-scale protests continued with time.[8] Additionally, Wickremesinghe has taken up the question of Tamil reconciliation at another level. He has invited all the stakeholders to talk about the contentious amendment, according to the 13th Amendment,[9] before the 75th anniversary of Independence.[10] But, the multiparty talks are not going to help out Sri Lankans, until they reach a consensus. There is a lack of consensus among political parties on the devolution of power from unitary to federal.[11] Therefore, the Tamils quest remains the same, whereas President Wickremesinghe’s intentions to declare a state of national emergency and use the military to suppress any public protests show the pressure he takes to restore the economy and bring stability to the political system in the country.[12]

Economic Crisis and Debt

The Covid-19 pandemic led the SriLankan economy into one of the worst economic crises it had ever faced. The severity of the crisis got manifested due to structural problems, political turmoil and some of the government policies.

The Sri Lankan economy relies extensively on its imports demand for minerals, fuel oils, machinery and electronic equipments. In terms of the domestic economy, some of the key economic sectors include tourism, tea, textile and agriculture. The pandemic brought down economic activities in the country as restrictions were imposed, not only on imports but also on the movement of people across the region. The rise in fuel prices and depreciation of the rupee in the aftermath of the Ukraine crisis worsened the economic crisis.[13] Additionally, political turmoil like thirty years of civil war, Easter bombing attacks and other terrorist activities had already made the country insecure. Government policies such as the ban on the use of chemical fertilizers in farming reduced agricultural production and aggravated the food crisis.

Another prime cause of the economic crisis in Sri Lanka is sovereign debt. It has been increasing with the pace of development and imports in the country. The nation has mostly relied on imports that can be configured around $18.3 billion in 2022. According to the latest data from the country’s central bank, the country has witnessed 11.4 percent decline in imports as compared to 2021. It was the result of “restructuring non-urgent imports and liquidity constraints that prevailed in the market for most of 2022”.[14] Besides, the restructuring of imports as well as state-owned enterprises, the government reduced subsidies for electricity, and increased taxes to boost revenue, to meet the $2.9 billion bailout plan of the International Monetary Fund (IMF) for repaying foreign debts.[15]

Sri Lanka's total foreign debt exceeds $51 billion (China 52, Japan 19.5 India 12), of which $28 billion has to be repaid by 2027.[16] After long negotiations among creditors including the bilateral lenders like China, Japan and India, IMF reached a staff level agreement with Sri Lanka in September, 2022. Meanwhile, the country was awaiting financial assurances from the bilateral creditors to tap support from the IMF.[17] Sri Lankan government representatives or consulates were in constant dialogue with India, Japan, and China. When India gave the assurance, China was under pressure to do the same. Therefore, now both countries, including Paris Club,[18] have given their assurance to IMF in support of Sri Lanka’s economic revival.[19] However, China and India, among other powerful countries in international politics, compete through agencies, such as IMF, in Sri Lanka for their strategic and national interests.

Security and Strategic Concerns

A certain amount of leverage in the IMF negotiations is given to Sri Lanka after a restructuring of debt which the country owes to China, Japan and India, among others. [20] Though Sri Lanka has a kind of love-hate relationship with the IMF,[21] the objective is to get a bailout package in favour that demands assurance of the guarantors. Besides, there is also a point of contention when countries, like China, India, Japan, US among others. They are vying to increase their own spheres of influence in Sri Lanka through the Line of Credit (LoC). Broadly, it is also interesting to note that the recent shift in the Indo-Pacific also reflects their security and strategic concerns in the Indian Ocean Region (IOR). External Powers, like China and Russia on the one hand and the US and Australia on the other, have drawn their own strategic contours in the region.[22] When China encircles the region for its commercial and infrastructural connectivity, the others want to ensure the free flow of commerce in the area.

China is trying to set its powerful hold in the IOR through Sri Lanka, which is also a part of the Belt and Road Initiative (BRI). It has its own strategic relevance, especially after India decided to remain out of the BRI, therefore, the strategic competition among countries in the region has become more significant. China has been accused of engaging Sri Lanka in debt-trap, especially after the Hambantota Port incident in which the China Merchants Port Holdings Company paid $US1.12 billion for an 85 per cent share in the port for a 99-year lease in 2017. [23] It can be considered a part of its decade old ‘string of pearls’ strategy.[24] Moreover, the arrival of Chinese space and satellite tracking vessel Yuan Wang 5 on August 2022, at the southern Hambantota Port, created new tensions in the region.[25] Immediately, India raised the geostrategic concerns with Sri Lankan President and sought assurances of not using port as a military base in the region.[26] After looking at the Chinese debt on Sri Lanka and its regional interference, the latter does not seem in a situation to ignore the wishes of the former. The BRI, however, as well as China's overall commitment to Sri Lanka, is waning in the post-pandemic world.

Sri Lanka is trying to balance India and China and counter the influence of external actors in the region. It can be seen through its multilateral engagement and active participation in regional and international organizations, such as the South Asian Association for Regional Cooperation (SAARC), and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC).[27] Sri Lanka hosted the fifth BIMSTEC Summit on March 30 2022, in which leaders adopted the BIMSTEC Master Plan for Transport Connectivity. It is also improving relations through Indian Ocean Rim Association (IORA), occupying the position of vice-chair in the association and has become a major trading partner of India under SAARC. According to India’s Ministry of External Affairs, Sri Lanka received unprecedented crisis support to the tune of US$3.8 billion in the first half of 2022, in line with its Neighbourhood First policy.[28] India has also promised to stand by Sri Lanka and help the neighbouring country to make the IOR safe and secure for the welfare of all.

Way Forward

Sri Lanka's debt restructuring has become embroiled in a geopolitical conflict with broad ramifications. Countries like China, India, Japan and the US constantly engage with Sri Lanka, particularly in the IOR, to protect and expand their commercial and security interests. Since major powers have conflicting interests in the region, debt restructuring for Sri Lanka has become more difficult. Since its independence, the country is first among thirty developing nations to experience debt issues, including the potential for default. Another surge in inflation following the next rupee depreciation could make people's standard of life in Sri Lanka even more intolerable. In contrast, the IMF has asked Sri Lanka to strengthen the legislative framework against corruption, and making anti-corruption a requirement in order to be eligible for a bailout.

President Wickremesinghe led government is making efforts and approaching major powers to deal with the crisis. Despite, the fact is that Wickremesinghe and his staff disregarded those in the ruling party who “committed acts of corruption and violence in the past”.[29] Therefore, many people are outraged that the new President and his team chose to ignore those members of the ruling party who had previously engaged in violent and corrupt behaviour. Even then, they aim for high-ranking posts in the administration rather than taking responsibility for their mistakes. There are many other problems related to corruption and security, nonetheless, the time is to pick a dependable friends and independent national council as a first step to restore order at home and then reach out to the potential actors for restructuring debt.[30] This is what, Sri Lanka, an economically shattered, politically unstable and strategically vulnerable country, can do at the movement.

Notes and References

[27]Sri Lanka hosted fifth BIMSTEC Summit on March 30, 2022. It was focused on the areas of connectivity and trade. Leaders in Summit noted the “urgency for leveraging geographical advantage and available resources in the BIMSTEC region to spur economic activities and address vulnerabilities in the post-COVID 19 recovery and rehabilitation process”.

(The paper is the author’s individual scholastic articulation. The author certifies that the article/paper is original in content, unpublished and it has not been submitted for publication/web upload elsewhere, and that the facts and figures quoted are duly referenced, as needed, and are believed to be correct). (The paper does not necessarily represent the organisational stance... More >>

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