The past year’s crisis will weigh on Sri Lanka for years to come

Author: Neil DeVotta, Wake Forest University

Economically, 2022 will rank as Sri Lanka’s worst year ever.  The immediate reason for the year’s economic carnage was a balance of payments crisis. It was exacerbated by high debt, the COVID-19 pandemic, the Russia–Ukraine War, global central banks hiking interest rates and dumb policy decisions made by the Gotabaya Rajapaksa administration.

The crisis prevented Sri Lanka from purchasing essential goods — especially cooking gas, gasoline, fertiliser and medicine. The year 2022 will be associated with the days-long queues people grappled with to procure essential items and seeing and hearing of people dying while standing in those same lines.

It was also the year of the political aragalaya (struggle) that . The aragalaya was tamed, but not before it forced former prime minister Mahinda Rajapaksa to flee his official residence in May and his brother, former president Gotabaya Rajapaksa, to flee the presidential palace in July 2022.

The aragalaya powerfully expressed the spirit of democracy and individual rights. But its demand for ‘system change’ was utopian. Its participants clamoured for better governance without interrogating the ethnocracy that undergirded Sri Lanka’s majoritarianism, corruption and impunity. It is best viewed as a mass agitation against corruption stemming from the scarcity of essentials. But the spirit of the aragalaya and its demands will resonate with the government as it negotiates the writing of a new constitution. President Ranil Wickremasinghe — who was installed as prime minister when the president and prime minister from the Rajapaksa clan fled — can be credited with taming the aragalaya.

Since becoming president, Wickremasinghe has used the armed forces to crack down on protestors. He has also used the legal system — including the draconian Prevention of Terrorism Act that has mainly been deployed against Tamils and Muslims so far — to intimidate protestors and keep their leaders on guard.

At the year’s end, the political climate seems stable on the surface. This is because the new regime could purchase and ration the most important imports — thanks partly to not having to make payments on external debts totalling over US$50 billion after it in April and effectively declared bankruptcy in July 2022.

But the price of goods has skyrocketed. Most Sri Lankans cannot afford to buy what was previously unavailable. The surface calm masks much suffering. According to the University of Peradeniya, over nine million people now live in poverty. Other reports claim around 70 per cent of people are being forced to eat less than usual, while 20 per cent of students are going to school without food. School dropout rates have increased, as have malnutrition and emaciation. Sri Lankans are leaving the country in record numbers, women are being trafficked to the Middle East and people are selling kidneys in desperation.

Politically, it seems that both much has changed and little has changed. The Rajapaksa family, who were mainly held responsible for destroying the economy, and their Sri Lanka Podujana Peramuna (SLPP) party continue to hold sway.

Wickremasinghe has enabled the Rajapaksas’ return to politics. This is partly because he has just one other parliamentarian from his party. It may also be due to his longstanding friendship with Mahinda Rajapaksa. He is, with good reason, widely denigrated as ‘Ranil Rajapaksa’.

In October 2022, the Sri Lankan parliament passed the 21st amendment to the constitution, which reinstated some oversight for independent commissions — practices that both Mahinda and Gotabaya Rajapaksa undid using constitutional amendments. In December, the president and the SLPP passed a budget for 2023. The budget is in line with International Monetary Fund (IMF) goals for the country and has been criticised for prioritising debt restructuring ahead of economic growth and inequality. It also allocates around $1.5 billion for the security forces, which the government relies on to keep anti-regime protests under control.

In September, the IMF agreed to a US$2.9 billion Extended Fund Facility and the Sri Lankan government hoped to have the mechanism finalised by December. But the inability to get China to agree to debt restructuring has delayed the process. The funds are unlikely to become available before March 2023.

China’s dithering has led to some negative sentiment. This is a surprising turn given how Sri Lankan media and politicians have historically self-censored any criticism of China. One member of parliament has even threatened to lead a ‘China Go Home’ campaign similar to the ‘Gota Go Home’ movement that ousted former president Gotabaya Rajapaksa.

The government does not plan to restructure concessionary multilateral debts. But debt restructuring with bilateral and commercial lenders coupled with the IMF funding will allow creditors and investors to engage with Sri Lanka with relative confidence. It is debatable if this would allow the island to reach GDP levels on par with 2019 by 2026, one of President Wickremasinghe’s goals .

Wickremasinghe was prime minister on before becoming president. During these stints, he consistently championed ambitious projects that have largely failed to materialise. Despite his pronouncements, Sri Lanka will likely experience more bankruptcies down the road.

Sri Lanka’s economy contracted by 9.2 per cent in 2022. It is slated to contract another 4.2 per cent in 2023. The upshot is that Sri Lanka will have lost nearly a decade of growth by the time it overcomes this economic crisis. It is a country that proudly reached upper-middle income status in 2019 only to be downgraded to lower-middle income status in 2020.

Some in the cabinet want Sri Lanka downgraded further to lower income status in the hope that this would allow the country to access concessionary loans. This all hints that the worst is, unfortunately, yet to come.

Neil DeVotta is a Professor of Politics and International Affairs at Wake Forest University.

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