• Robbie Sutton

Crisis in Sri Lanka: Gotabaya’s Debts Come Due

Sri Lanka has been experiencing a deepening economic crisis since 2020; a dangerous intersection of inflation and shortages to foreign currency reserves which has resulted in rapid price increases to essential goods and services. Since February 2022, the crisis has reached a critical stage, with severe shortages of essential goods such as cooking gas, diesel and medicines now being reported. Unsurprisingly, this crisis is generating considerable political unrest aimed at incumbent President Gotabaya Rajapaksa and more broadly his family, which has dominated Sri Lankan politics for years now, with two brothers and a nephew holding positions inside ‘Gota’s’ cabinet.


Identified Causes

Protestors demanding the governments resignation gathered outside the Colombo Municipal Council. Credit: Eranga Jayawardena/AP Photo

Coverage of this crisis so far has most commonly identified the immediate cause as the effective shut-down of the tourism industry, affected first by the 2019 Easter bombing attacks, and then the ongoing COVID-19 Pandemic; the former discouraging international travel to Sri Lanka, while the latter outright preventing it. The South China Morning Post and The Week also identified long term policies, specifically the use of foreign loans (mainly from China) to finance large but questionably profitable infrastructure projects (such as the now notorious Hambantota Port), the disastrous effort to convert Sri Lankan agriculture to a fully organic model in 2019 by banning imports of fertiliser, and a sweeping reduction in taxes as having contributed heavily to the crisis. In particular, the former has resulted in the decline of Sri Lankan agriculture by roughly 30%, and necessitated the import of rice and other staples from India, China and Myanmar, further straining foreign currency reserves. According to an article by DW, foreign currency reserves have declined by 70 per cent since January 2020, all while the government faces debt payments equal to $4 Billion USD through 2022. This has crippled Sri Lanka’s ability to import key commodities and goods and is rapidly deepening the impact on the day to day lives of Sri Lanka’s citizens.

"According to an article by DW, foreign currency reserves have declined by 70 per cent since January 2020, all while the government faces debt payments equal to $4 Billion USD through 2022."

Underlying all of these problems however, is a structural reliance by Sri Lanka on long term governmental debt and borrowing cycles. Umesh Moramudali, writing for The Diplomat,noted in February of 2021 that the debt situation was becoming increasingly critical, principally due to the changeover from mostly concessionary loans provided by international development agencies to mostly privately held debt, with a much more aggressive repayment regime and higher interest, beginning in 2007. According to Sri Lanka’s Department of External Resources, as of April 2021, $16.38 billion (47 per cent) of Government Debt was held by the private market, $4.41 billion (13 per cent) by the Asia Development Bank, $3.388 billion by China, $3.36 billion by Japan, $3.23 billion by the World Bank and just $859 million by India. According to Reuters, as of 2020, some two thirds of the private market debt came from International Sovereign Bonds (ISB), so it is difficult to tell exactly who has been investing, and thus, who will be seeking repayment. At least some percentage of these loans will be maturing (reaching the date by which the principal, the original sum lent, is expected to be repaid) each year, and this process is coinciding with a diminishing ability for Sri Lanka to produce the cash needed to do so.


According to Moramudali,


On the other hand, FDI (Foreign Direct Investment) inflows remain low and successive governments have failed to reach annual FDI targets. This meant that foreign currency inflows did not see a considerable improvement while foreign currency outflows grew due to ISB maturities and other loan repayments. This growing mismatch between forex inflows and outflows caused Sri Lanka’s foreign reserves to run dry, forcing the governments to issue still more ISBs to settle massive debt repayments. In this sense, Sri Lanka’s foreign debt problem is not merely a debt problem; it is a complicated macroeconomic and political problem including the country’s international trade and investment, which in turn shape its BOP (Balance of Payment).


Moramudali’s analysis of the deeper foundations of Sri Lanka’s crisis was only off in that it took a few months longer for the repercussions of this policy to reach criticality and burst forth into mass politics.


Domestic Unrest


As the effects of this crisis, namely the combination of rapid inflation and shortages of essential goods, have begun to hit the Sri Lankan citizenry, there has been a rather unsurprising political backlash, growing unrest and insurrection.


The first major demonstrations began on the 16th of March, as rallies organised by the United People’s Force (Samagi Jana Balawegaya), the main opposition party, demanding the resignation of President Rajapaksa and his government. Since then, the protest movement has swelled, with repeated demonstrations outside the houses of leading politicians and members of the Rajapaksa family. A major protest camp has coalesced around the Galle Face parklands, on the shoreline of the capital, Columbo. Demands have consistently centred around the departure of the Rajapaksa family from government, and the provision of essential goods to those in need. Events remained peaceful up until March 31st, when a crowd of hundreds clashed with police at barricades just outside of the President's home. The government subsequently declared a curfew, which proved unenforceable and was withdrawn after only 5 days. Even then, it took until April 20th before the first direct death occurred, when police opened fire on protestors in the town of Rambukkana, with Leader of the Opposition Sajith Premadasa calling his death a ‘brutal murder’ at the hands of the “terrorist government”


Prime Minister Mahinda (left) and President Gotabaya Rajapaksa (right) in 2020. Credit: Dinuka Liyanawatte/Reuters

The Rajapaksa government did attempt to appease the growing protest movement by firing Finance Minister Basil Rajapaksa, the President’s brother, and seeking a unity government with the opposition. However, Rajapaksa’s replacement, Ali Sabry (previously of the Justice Ministry), himself resigned barely 24 hours later, along with a swath of other legislators. With no one else willing to take the role, Sabry would return to the position on 8 April in order to head the belated negotiations with the IMF (whom Gotabaya’s government having long sought to avoid dealing with, preferring to renegotiate debt conditions bilaterally). This demonstrates the crippling limits of the government’s political capital, further exemplified by the failed efforts by Gotabaya to form a unity cabinet with the opposition, who have all rejected such a plan.


The opposition to the Rajapaksas and their Sri Lanka Podujana Peramuna (Sri Lankan People’s Front [SLPP]) parliamentary coalition faces a difficult road even if they can successfully dislodge Gotabaya without the situation escalating out of control. According to Alex Keenan, writing for the International Crisis Group, Gotabaya has shown no intention to step down even as his parliamentary coalition unravels, and it is unclear if the opposition bloc (an unlikely mix of the liberal United People’s Power/ Samagi Jan Balawegaya coalition, defectors from the SLPP, and the Marxist-Leninist ‘Peoples Liberation Front’/Janatha Vimukthi Peramuna [JVP]) could muster the numbers to impeach or dismiss him through parliamentary channels.

"The groundswell of public anger towards the government is not totally united in how the underlying crisis should be approached..."

The groundswell of public anger towards the government is not totally united in how the underlying crisis should be approached however, and as the spectre of austerity or public sell-offs as a measure for resolving the government's debts has created its own mobilisation. Demonstrators from JVP’s youth wing rallied on 30 March against the transfer or sale of industrial assets (namely the Trincomalee Oil Tank complex and Yugadanvi Power Plant) to foreign companies. According to Keenan, the IMF has already stipulated that serious austerity measures will be required as a precondition for its support, which could prove divisive in the extreme to any post-Gotabaya governing coalition depending on its political composition.


The Rajapaksa’s intransigence, combined with political deadlock and worsening material conditions for the average citizen, present a growing risk of escalation. Gotabaya made his name and ultimately political fortune as a General during the brutal war between the Sri Lankan state and the Liberation Tigers of Tamil Eelam, and there remains the risk that he will order the army to engage the protests with force. It also remains to be seen how the still fragile relationship between Tamils and the majority Sinhalese will affect or be affected by this new crisis. The main protests have been principally in the Sinhalese areas in the south of the island, where previous relative prosperity has been perhaps more sharply affected by the crisis, but Tamil groups have also begun to mobilise in late April, with marches demanding not only the resignation of Gotabaya, but substantive reformation of the Sinhala dominated political system.


Note: for a more in depth look at the inter-ethnic relations of Sri Lanka and the ongoing peace and reconciliation process, see the Red Line Podcast Episode 57.


Geopolitical Ramifications


The crisis presents an interesting moment within the broader tussle for influence in south Asia between India and China. China had been a major benefactor to Sri Lanka over the last two decades, having extended billions in loans and financial assistance, and Sri Lanka began negotiations in April for additional loans, lines of credit, and restructuring of existing debts. Sri Lanka’s involvement within the PRC’s ‘Belt and Road Initiative’ has been controversial, and while often cited as having created an underhanded political influence in Sri Lanka, with projects like the now infamous Hambantota port leading to the commonplace “debt-trap diplomacy” narrative. Although arguably myth, the narrative is compelling to many as it does in some ways get at the massive material imbalance of power between China and many of the smaller countries it deals with and seeks relations with.

Protesters demand the resignation of Sri Lanka's President Gotabaya Rajapaksa in Colombo on 4 April. Credit: Reuters.

The current crisis puts Sri Lanka, never a geopolitical heavyweight, into an increasingly desperate position. The sharper the crisis becomes, as the largest ISB payments come due ($1 billion USD in July alone), the greater the need for foreign currency whatever the source, and thus the greater the leverage available to whomever is willing to offer the money. India, as Sri Lanka’s main neighbour, has extended lines of credit to the tune of $1 Billion, as well as arranging debt and currency swaps, in order to avoid a complete collapse. With refugees having begun attempting to cross the Palk strait illegally by late March, India will also undoubtedly be concerned about any large-scale displacement should supply chains break down completely on the island, or violence between the government and protestor’s escalate. The crisis is equally an opportunity to bring Sri Lanka more firmly into geopolitical alignment with India, ending the era of Sri Lanka’s cautious balancing (in deeds if perhaps not quite in words) between the two would-be superpowers of the Indian ocean.


Likewise for China, rescuing Sri Lanka from its current woes could net them a grateful and more committed ally, which would be a useful component with their broader Indian Ocean Strategy. As China seeks to establish a greater presence and influence in the region, principally as means to secure vital trade lines (the so-called “Maritime Silk Road”) between itself and key resources (namely oil) in the Persian Gulf, it has sought to secure basing rights for its growing fleet. This has quite naturally brought China and India into tension, as India sees this as both an intrusion into its immediate security space and as a means to throttle India’s own ambitions. This intensified diplomatic manoeuvring raises the spectre of more direct competition, especially on an island as strategically situated as Sri Lanka. A potential worst-case scenario would be, should the Sri Lankan crisis break into a revolutionary moment or outright civil war, both China and India engaged in effectively a proxy war, backing preferred factions in order to ensure the others' exclusion from the island.

"The current crisis puts Sri Lanka, never a geopolitical heavyweight, into an increasingly desperate position."

For the immediate future, sadly, Sri Lanka is unlikely to see happier times. While the ongoing negotiations between the Rajapaksa government and the IMF may well prove fruitful, or at least find a way to tide Sri Lanka’s struggling citizenry over, there is unfortunately still much scope for things to get worse. Even with an IMF deal, the road ahead will likely be harsh, creating further political difficulties. Should the government resort to wide-scale force in order to remain in power, then a greater political dislocation along ethnic or class lines, with all the attendant horrors, remains on the cards. Even in a hypothetical post-Gotabaya Sri Lanka, opposition factions like the ‘United People’s Power’ and the ‘People’s Liberation Front’ may find themselves enemies. All the while, Sri Lanka’s creditors will remain on the sidelines, awaiting what is owed them.


Robbie Sutton is a graduate from the University of Queensland in Peace and Conflict Studies, with a Masters in International Relations. His area of focus is civil unrest and revolutions.

 

Written by Robbie Sutton

Edited by Wade McCagh