Sri Lanka crisis entirely of its own making
Country faces Lebanon-style economic meltdown
Ravi Ratnasabapathy is an independent consultant based in Colombo.
A wave of spontaneous protests sweeping through Sri Lanka has shocked the authoritarian government of Gotabaya Rajapaksa and threatens its survival.
Elected in 2019 amid a wave of euphoria, the former soldier was expected to deliver security and rapid growth, but instead, the country finds itself mired in the worst economic crisis in its history.
Public opinion soured last year as the regime blundered; growth stalled, inflation soared and the currency came under pressure. While the pandemic has contributed to the economic woes, the problems are largely of its own making.
Populist tax cuts in 2019 that were financed through money-printing has led to a balance of payments crisis. As the fiscal deficit ballooned, rating agencies downgraded the country's debt and an IMF stabilization program was derailed. This shut the country out of international capital markets, making it impossible to roll over maturing debt or finance the growing current-account deficit.
Despite repeated warnings from independent analysts, the government continued with its homegrown policy: import substitution to save foreign exchange.
This misguided effort to save foreign exchange by banning the imports of things such as chemical fertilizers backfired badly as food production dropped and prices rose. Available foreign reserves were run down anyway to service international debt.
The import controls crippled the economy, causing widespread shortages and rising prices. As the foreign reserves dwindled, the government turned to friendly countries for short-term currency swaps to manage the crisis.
These did not address the fiscal and monetary causes of the underlying problems, but they did allow the government to continue with its profligate economic policies, worsening the problem. As the reserves dwindled, shortages of goods became more apparent.
The government seemingly believed its problems to be solely pandemic-related and that the situation would quickly return to normal once tourism improved. Unfortunately, the import restrictions now threaten the viability of the very sources of foreign exchange that the government was relying on to fix the problem in the first place.
Smaller export factories struggled to meet production deadlines due to power cuts, finding themselves unable to run generators due to shortages of fuel. Restaurants and hotels could not cater properly to tourists as they struggled to obtain supplies of cooking gas and ordinary food ingredients. Remittances, another key source of revenue, dried up when the government tried to fix the currency at an artificially low rate.
Discontent had been growing over the past year over rising prices and shortages of essentials such as cooking gas, food and medicines. Fuel began to run short in January and power outages became more frequent. Queues for basic goods and services stretched for kilometers, forcing consumers to spend hours in the scorching heat as the country entered its hot season.
The currency collapsed in the first week of March, and public anger began to boil as power cuts were extended for up to 10 hours a day. A wave of spontaneous nonviolent civilian protests swept through the country for some weeks, conveying a compelling demand for change, but, amazingly, the government failed to respond or even acknowledge the problem.
A massive gathering outside the president's residence on Friday that ended in violence appears to have shocked the government. To avert further protests scheduled for Sunday, a 36-hour curfew was declared and all social media was blocked. But this only seems to have caused further outrage, with protesters taking to the streets in defiance of the curfew.
By Sunday evening, several cabinet ministers had offered to resign, and on the next day, the government lost its two-thirds parliamentary majority, with the major opposition party demanding the president resign.
Sri Lanka's government has lost its public legitimacy, but the country's presidential system, which delegates so much power in the office of the president, makes power-sharing with opposition parties difficult. The directly elected president has the power to appoint or dismiss the prime minister and any member of the cabinet.
The ease with which coalition partners can be dismissed has meant that previous attempts to form grand coalitions in 2002 and 2015 have proved to be short-lived. Because of this, the current opposition is wary of cooperating with the president, but at the same time is unable to remove him, resulting in a deadlock that will be difficult to break.
Meanwhile, the protests have intensified and people from all over the country have resorted to gathering outside the houses of politicians to make their voices heard. And while the political situation remains fluid, the lack of clear leadership from the opposition parties is contributing to the delay in finding a way out of the crisis.
Ultimately, the current crisis has demonstrated that Sri Lanka's political leadership, both government and opposition, seems unable to grasp the gravity of the issues at hand. The only positive note has been the decision by Ajith Nivard Cabraal, the governor of the Central Bank of Sri Lanka who presided over the money printing spree, to resign. He has been replaced by an orthodox economist who is expected to return to monetary prudence.
Sri Lanka's economic problems are daunting, and unless firm steps are taken to restore confidence and stability, things could spiral entirely out of control and lead to a Lebanon-style meltdown.