In the 1980s, a Newsweek headline described Sri Lanka as “the Lebanon of South Asia” after ethnic divisions erupted in a civil war that lasted about 3 decades. social and political crisis that has forced the president to resign. How has it been produced and what will happen next in this small island state in the Indian Ocean?
At the structural level, the existing economic crisis is rooted in balance-of-payments challenges marked by declining foreign exchange reserves, exports, remittances from foreign personnel and foreign investment. control practices. Sri Lanka’s expansion as a middle-income country has exacerbated the challenge due to the loss of concessional loans and has accelerated the time to repay debt.
Exacerbating some of Sri Lanka’s structural challenges, the leaders made direct mistakes such as tax cuts, banning the import of chemical fertilizers, and printing currency that drastically devalued Sri Lanka’s rupee. These political mistakes occurred in the context of Covid-19, which has hampered the tourism industry’s ability to generate revenue. Finally, the Russian invasion of Ukraine in February exacerbated an already bad scenario with emerging costs globally. In April, Sri Lanka defaulted on its debt for the first time in its history.
The immediate effect of the economic crisis has been shortages of basic commodities such as fuel, cooking gas, electricity, food and medical supplies. As of July 22, the World Food Programme estimates that 6. 3 million people, or about a quarter of the population, are food insecure and that this number may increase as the crisis continues. Up to 90% of the population skips food because they have no money to feed themselves.
Widespread public protests led to the resignation of the country’s prime minister, Mahinda Rajapaksa, in May. When his brother, Gotabaya Rajapaksa, gave no indication about the timing of his resignation as president, protesters occupied his home and this month forced him to flee the country and resign.
Some observers have blamed Sri Lanka’s turmoil on its relations with China, which has invested heavily in the country. Recently, CIA Director William J. Burns, the most recent U. S. official in recent years, has characterized Sri Lanka’s economic crisis to Chinese debt. Sri’s overall external debt, Chinese government loans range from 10 to 12 percent. Adding China’s advertising loans to a broader base of state-guaranteed debt, new research estimates that China’s lending figure stands at around 20 percent.
But despite China’s deep involvement in the island nation, it is not the main culprit in the existing debt crisis. In fact, foreign sovereign bonds make up the largest share of Sri Lanka’s external debt: 36. 5% of total external debt and 47% of total external debt payments until the end of 2021. Basically, they are owned by private investors in the United States.
That’s not to say China deserves to get a pass for its economic relations with Sri Lanka, given that it was given a lease of more than 99 years to operate the port of Hambantota. Nor does it excuse Sri Lanka for avoiding facing a balance. of the crisis of the bills that took time to arrive. But U. S. officials deserve to perceive the structural and domestic reasons for the crises in Sri Lanka and other small states before defining crises in terms of strategic festival between the major powers.
So what comes next? After being elected speaker of parliament for the renewal of Gotabaya Rajapaksa’s mandate ahead of the 2024 elections, Ranil Wickremesinghe began his tenure with police and military forces dismantling the main protest site. This action worried many observers, and added the U. S. ambassador to the U. S. The most sensible priorities will be to conclude a bailout with the International Monetary Fund (IMF), add a restructuring of Sri Lanka’s debt for the first time, and have interaction with bilateral progress partners such as China and India. Wickremesinghe is to have a merit as he has extensive relations with foreign stakeholders and enjoys in the past negotiating with the IMF. However, the use of force by the new leadership opposing nonviolent protesters will not help ease concerns within the IMF about political stability in Sri Lanka before agreements are reached. .
Protests opposed to the Rajapaksas were notable for attracting broad participation from all demographic groups, adding Sinhalese, Tamil and Muslim citizens. In a context of unprecedented national crisis, the new government may decide to bet on this unity. However, at present, the new president, whose space was set on fire during the protests, remains unpopular and will have to win public acceptance amid austerity measures that are expected to last for years. The way forward remains precarious in Sri Lanka.
Nilanthi Samaranayake is director of the Strategic and Policy Analysis Program at CNA, a nonprofit organization in Arlington, Virginia. She studies small states in wonder powers rivalry and American strategic alliances and partnerships. @Nilanthis
The perspectives expressed in this article are those of the author.