Sri Lanka’s debt crisis creates economic turmoil

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Populist politicians, who have risen to power in countries around the world, base their appeal in part on claims that they will base their policies on the needs and interests of the people. But once in power, their decisions, often ill-conceived, can create serious problems for the very voters they claim to defend. For proof, look no further than what happened to the people of Sri Lanka.

In recent months, life on the island nation has turned into a crushing and increasingly difficult ordeal. What started as a public debt crisis has morphed into a broader economic crisis, marked by critical shortages of basic commodities, widespread poverty and runaway inflation. Fights break out in the markets as buyers struggle to find what they need and afford it when they do, as prices skyrocket out of reach. Food has become scarce and expensive. Power outages have left the capital, Colombo, in darkness for hours every day. Drivers spend hours queuing for gas; two men even died last week while waiting in the sweltering heat. In mid-March, the government canceled school exams for millions of students due to paper shortages.

Of course, the Sri Lankan government cannot be blamed for how the coronavirus pandemic has decimated the country’s vital tourism industry. And he can’t be blamed for Russia’s invasion of Ukraine, which has driven up oil and grain prices, adding to the supply chain problems and inflation problems that already plague the world. . But the government and its leaders, including several members of the powerful Rajapaksa family, can be blamed for policy decisions at the heart of the current economic crisis, which is now fueling the biggest protests Sri Lanka has seen in many years.

The origin of many of these policies dates back to 2019, when Gotabaya Rajapaksa, the brother of former President Mahinda Rajapaksa, was a presidential candidate. Mahinda, who ruled from 2005 to 2015, enjoyed a strong base of support built in part on his 2009 defeat of the Liberation Tigers of Tamil Eelam – the guerrilla group also known as the Tamil Tigers – that ended Sri Lanka’s decades-long civil war. Gotabaya had served as defense minister during that war, earning a reputation as a security hawk despite the widespread human rights atrocities the state allegedly committed during his tenure.

That reputation served him well when, months before the 2019 election, terrorists launched a gruesome series of attacks on Easter Sunday, targeting Christian churches and luxury hotels and killing nearly 300 people. The shocking events helped propel security-conscious Gotabaya to victory.

During the campaign, Gotabaya had promised to cut taxes, and once in power – facing crucial legislative elections to come – the new president moved quickly to reduce them. The tax cuts, while predictably popular, took central bankers by surprise. Senior bank executives said they were blindsided by the questionable policy, which was crafted without “any kind of consultation process”.

The cuts were particularly dangerous because the previous Rajapaksa administration had gone on a rampant borrowing spree, launching spectacular infrastructure projects that appeared to benefit China more than Sri Lanka. One such project, the Port of Hambantota development, has since become the iconic example of China’s dreaded ‘debt trap diplomacy’, a ploy by which China is said to have extended its influence by lending to developing countries. more money than they could ever pay back, for projects they don’t really need. When Sri Lanka proved unable to repay its loans, China ended up taking possession of the port of Hambantota, as well as huge tracts of land around it.

It is no secret that better management by the populist Rajapaksa brothers could have done a lot to prevent this catastrophe.

The author of this perilous legacy, Mahinda Rajapaksa, is now Prime Minister. A third Rajapaksa brother, Basil, serves as finance minister, while a fourth, Chamal, sits in the Cabinet. And that’s not all: two of Gotabaya’s nephews are also ministers and another is his chief of staff, in addition to other close relatives who serve in the government.

Despite the country’s debt burden, the Rajapaksas cut value-added taxes by almost half, mostly eliminated capital gains taxes, and granted special reductions to certain industries, thereby reducing government revenue. ‘State.

Shortly after the cuts of 2019, the year 2020 rolled out its surprises. The coronavirus pandemic has crushed Sri Lanka’s tourism industry right after government revenue was cut. The global health crisis has also reduced the remittances that Sri Lankans abroad normally send home by billions.

Last November, Basil Rajapaksa confidently declared that the situation was under control, boasting that “Rajapaksas are used to never being intimidated by challenges”. But this year, Russia’s invasion of Ukraine in late February made matters worse, increasing the cost of oil and grain imports. By the end of March, the government’s hard currency reserves had shrunk by almost 70% since January 2020, to just $2.3 billion. This figure is particularly alarming given that Sri Lanka has to meet debt payments totaling more than $4 billion this year alone.

In response to this shortfall, the Rajapaksa government cut imports last year, creating shortages of essential goods. In a particularly misguided move, the government banned fertilizer imports, outraged farmers, who had correctly predicted huge yield declines. By the time the Rajapaksas reversed the ban in December, the damage was done. Agricultural experts estimate that yields of rice, one of the country’s staple crops, will fall by more than 30%, worsening food shortages and worsening the annual inflation rate, which is now above 17%. Rating agencies, meanwhile, saw the liquidity crunch coming and in January significantly downgraded Sri Lanka’s debt, making it virtually impossible for the country to borrow through regular channels.

Despite its initial reluctance to approach the International Monetary Fund, the Sri Lankan government eventually called on it for help. After a review, the IMF ominously declared the situation “unsustainable”, noting that the measures needed to reduce debt levels “would require excessive adjustments over the next few years”, and predicting the economic consequences for the years to come. to come.

Even as it negotiates with the IMF to get out of its debt maze, Sri Lanka is trying to exploit one of its perennial geopolitical advantages: the rivalry between India and China, who have been quarreling for Sri Lanka’s allegiance for decades. The island is small, but its strategic location at the intersection of many Indian Ocean shipping routes amplifies its importance.

As a result, China and India alternated in supporting Sri Lankan factions. The Rajapaksas have traditionally been closer to China, but this time they went hat in hand to both powers, desperate for funds to prevent a political settlement. With half a million people falling into poverty and millions more enduring hardship, the conditions are ripe for serious social unrest.

India is considering a Sri Lankan request for $1.5 billion in additional credit, money that would be used to import basic supplies to ease the suffering of the restless population. India only recently opened another $1.5 billion credit line, and China is also considering a $2.5 billion credit request.

As they queue for hours to buy food and fuel, Sri Lankans understand that the pandemic is one of the main reasons why their standard of living has deteriorated so dramatically. But it is no secret that better management by the populist Rajapaksa brothers could have done a lot to prevent this catastrophe.

Frida Ghitis is a global affairs columnist and regular contributor to CNN and The Washington Post. His WPR column appears every Thursday. You can follow her on Twitter at @fridaghitis.

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