The lessons of Sri Lanka

The President of Sri Lanka, Gotabaya Rajapaksa, who fled his country after his house was overrun by waves of Sri Lankans who, since March, had been protesting the collapse of the economy under his and his family’s rule for almost two decades, has finally resigned. He had flown on a military jet to the Maldives, and then on a commercial flight to Singapore. Former Prime Minister Ranil Wickremesinghe was on Friday sworn in to act as President, and declared a nationwide state of emergency as he manoeuvred for Parliament to elect a new President.
Like Guyana, Sri Lanka is a bicommunal society that exemplifies the depth and persistence of ethnic divisions. There, the majority, 75% mostly Buddhist Sinhalese, had been joined by Indian Hindu Tamils from across the straits in India over a thousand years ago, and, more recently, more Hindu and Muslim Tamils during the British colonial era. Also, like Guyana, the politics became ethnicised at independence (1947), as they adopted democratic parliamentary governance, with the two groups voting for different parties. By 1983, feeling discriminated against and oppressed, the “Tamil Tigers (LTTE) of the Tamils, concentrated in the north and east of the island republic, launched a guerrilla war to secede. It was not until 2009, when Gotabaya was Defence Chief under his brother Mahinda’s Presidency, that he brutally ended the war. At least 40,000 Tamil citizens were killed during that operation, and overall, over 100,000 were killed.
Under the cloak of Sinhalese nationalism, stoked by Buddhist monks who extolled the “victors”, the Rajapaksa brothers nepotistically brought other family members into the Government, which became increasingly despotic and corrupt as they excluded Tamil citizens. Their rule also became quite idiosyncratic, as decision-making was concentrated within their family circle and close coterie. What Sri Lanka demonstrated is how easy an economy integrated into a globalised world can implode after poor policy choices.
Over the past decade, the Sri Lankan Government borrowed vast sums of money from foreign lenders to fund infrastructure for public services. Two examples were the Hambantota Port and the Mattala Rajapaksa Airport – constructed with loans from China at a cost of over $2 billion. They became white elephants, since they had almost zero utility. They could not service foreign debts of US$51 billion, and suspended debt payments, which ruined their credit rating and pushed them into the arms of the IMF. Simultaneously, their economy was hit by external and internal shocks from which it never recovered, and which subsequent policy decisions exacerbated. To please the ecologically woke foreign constituency, they banned chemical fertilisers, which immediately decimated farmers’ harvests, reducing exports and foreign exchange. They had to import rice for the first time.
Facing a massive deficit, Rajapaksa slashed taxes in a doomed attempt to stimulate the economy. But the move backfired, instead hitting Government revenue. That prompted rating agencies to downgrade Sri Lanka to near default levels, meaning the country lost access to overseas financial markets even as foreign direct investments plunged. Sri Lanka then had to fall back on its foreign exchange reserves to pay off Government debt, shrinking its reserves. This impacted imports of fuel and other essentials, which sent prices soaring. Topping all that, the Government, in March, floated the Sri Lankan rupee, which plunged against the US dollar, making things worse for ordinary Sri Lankans, as inflation soared to double digits, reaching 54% last month.
The country’s foreign exchange reserves plummeted to record lows, with dollars running out to pay for essential imports, including food, medicine and fuel — leaving millions unable to feed their families, fuel their cars, or access basic medicine. COVID-19 was the final blow, as it reduced tourists, and even remittances, when the world shut down. These drove the largely peaceful protests, until their storming of the President’s home. Tackling the balance-of-payment crisis would require structural reforms to address constraints to domestic and foreign direct investments, industrial competitiveness and exports. It is doubtful that the interim Government which is to be formed can deal with all these challenges.
Forewarned is hopefully forearmed for our leaders.