In Sri Lanka, an economic crisis foretold

Ajith Kumara has lived every day of the last two years with the same soundtrack — a deafening snatch of Beethoven’s Für Elise blaring through his speakers. When the pandemic spelled gloom for many, he left his job as a truck driver to become a mobile vendor. Sri Lanka’s familiar choon paan (tune bread) vans, with the 1810 classic as their signature tune, have been taking bread and other bakery products to people’s doorsteps for decades. They were especially valuable during the stringent lockdowns, when stepping out meant risking police arrest. Driving around Colombo’s suburbs with a curfew pass from his employer, Kumara landed on his feet during tough times, but the current economic crisis may pull the rug from under him.

“Business has fallen by more than half. If there is fuel for the van, there is no gas at the bakery. If there is gas, there is no electricity. If there is electricity, we can’t find baking ingredients, or there is not enough water,” he says, parked at Dematagoda, a Colombo working-class suburb where many low-income families displaced by development at the city centre have been rehoused. “When we somehow find everything, and bring bread and buns for sale, people say they can’t afford to buy them anymore. This is the situation.”

It is dire, by all accounts. Hospitals are putting off surgeries without enough medical supplies, ink and newsprint shortages have forced newspapers to suspend editions, and schools have postponed term exams because there is no paper to print the questions.

People stand in queue to buy kerosene oil at a petrol station in Colombo on March 25, 2022.
| Photo Credit: AFP

For a daily-wage worker like Kumara, if earnings are slashed by half, it means one meal less a day. The 48-year-old vendor works for a small bakery, spending part of his daily earnings on hiring his vehicle and precious diesel. He saves the rest to support his family of four in Minuwangoda, in the neighbouring Gampaha district. “People are starving today. That is what they [those in power] have done to us,” he says.

Kumara was among the 6.9 million people who voted for President Gotabaya Rajapaksa in November 2019, propelling the former soldier to the country’s most powerful seat. That, followed by a thumping two-thirds majority in parliament in 2020, made the Rajapaksas nearly as formidable as they were in 2010, just after the “victory” in the war. But their renewed popularity after five years in opposition, which even withstood the early blows of the pandemic, is now crumbling. The scale of this economic crisis is unprecedented, making it arguably the worst in the island’s history.

The Sri Lankan rupee has plummeted in value against the U.S. dollar with importers now needing LKR 300 (and much more on the black market) to buy one dollar. The country’s foreign exchange reserves were already under strain after the Easter Sunday terror attacks of 2019 halted tourist arrivals and foreign investment inflows slowed down. Reserves are now barely enough to pay for a month’s imports. The dollar crunch and severe shortages of essentials are grabbing global headlines, often accompanied by pat explanations of a “Chinese debt trap” or “Ukraine war impact”, with much less airtime for Sri Lanka’s own story.

Families are skipping tea and foregoing meals, queuing up for hours to buy cooking gas or kerosene, and coping with day-long electricity cuts in this season of sweltering heat. They see “failed leadership” as the reason for their plight, not some complex macroeconomic puzzle.

“No different”

“I thought Gotabaya would be different from the others. He helped us win the war [against the LTTE]. As Secretary [to the Defence Ministry under which the Urban Development Authority functions], he developed and beautified Colombo. But as President he is unable to do even what he did as Secretary,” Kumara says, echoing the growing disenchantment among supporters. Gotabaya’s once appealing and powerful image as a leader who promised ‘vistas of splendour and prosperity’ has fallen.

The hashtag #GotaGoHome was trending last month among Sri Lankans on Twitter, later overtaken by #RajapaksasGoHome. Middle-class citizens and the political opposition are on the streets every day, protesting against the government’s failings and indifference to the misery of the people. On Thursday night, hundreds of people took their rage right to the doorstep of Gotabaya’s Colombo residence, chanting slogans asking him to quit.

Protesters gather outside President Gotabaya Rajapaksa’s residence on March 31, 2022, demanding that the government step down for “mishandling” the economic crisis. The protest soon turned violent.
| Photo Credit: AFP

Sri Lanka’s ruling administration has four Rajapaksa brothers and one son in the Cabinet, in addition to other family members in prominent positions. Months into the economic meltdown, none of them has shown signs of recognising the suffering of the people, let alone take responsibility for it.

“This crisis was not created by me,” Gotabaya said in a televised address on March 16. He was not entirely wrong. The COVID-19 pandemic’s impact on key foreign exchange earners — tourism, garment and tea exports, and migrant workers’ remittances — dealt a deadly blow to an economy already reeling from the shock of the Easter Sunday bombings.

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In fact, the crisis announced its arrival in stages, since the outbreak of COVID-19 — in the mass sacking and deportation of Sri Lankan workers in West Asian countries, raging infections that stalled production factories catering to the export market, the closure of commercial establishments during lockdowns, and the consequent losses of jobs and incomes. In 2020 alone, real GDP contracted by 3.6%. At the macro level, a significant drop in export revenue, a high import bill (over $20 billion in 2021) and impending foreign debt obligations totalling nearly $7 billion this year were obvious warning signs.

“This government knew for the last two years that our economy was going to crash. Even then it was in denial. It had no plan, no strategy,” says S. Kalidasan, who works at a neighbourhood eatery in Colombo to support his wife and three children living in Hatton, in the Central Province. “A worker who earns about 1,200 rupees for a day’s labour can barely buy a packet of milk powder with it today,” he says, referring to an essential item in Sri Lanka, whose dairy sector relies heavily on imported milk powder. Food inflation hit a record high of over 25% in February, with the prices of rice, pulses, fish, chicken, vegetables, and coconut skyrocketing.

When policy backfired

The President’s decision from 2020 to restrict imports, including of food items and inputs into agriculture, was aimed at conserving foreign exchange. Driven by that logic, he banned chemical fertilizer imports in May 2021, forcing the country to switch abruptly to organic farming. The move is now posing a serious threat to Sri Lanka’s food security.

Sri Lankan Prime Minister Mahinda Rajapaksa arrives at Sri Lankan President Gotabaya Rajapksa’s residence the night after protesters gathered outside demanding that the government step down.
| Photo Credit: AP

The import restrictions were neither based on a considered strategy (imported luxury foods can still be found in supermarkets) nor were they accompanied by a corresponding boost in domestic production that could have stabilised consumer prices. After mass protests by farmer groups, many from among the regime’s core constituencies, the government in November 2021 rowed back on its evidently ill-advised policy on agrochemicals. But the damage had been done. Crop scientists have predicted a dramatic reduction in annual harvests — a 40-45% drop in paddy yield alone. Less than a year after its ban on chemical fertilizers, the government is now forced to import more food staples including rice. The outcome is the opposite of what it had intended.

As fears of hunger and starvation grow, the government is seeking help from near and far. In February, the Ministry of Trade said it was importing 3,00,000 tonnes of rice from India and 1,00,000 tonnes from Myanmar to control rice prices locally. Last week, the Chinese government announced a gift of 2,000 tonnes of rice to Sri Lanka.

Apart from food grains, cash-strapped Sri Lanka is also frantically seeking financial help from different sources. India has extended $2.4 billion emergency support this year. China is “studying” a fresh request from Colombo for assistance of $2.5 billion, in addition to the $2.8 billion that Beijing has extended since the outbreak of the pandemic. Significantly, India and China are yet to respond to Colombo’s requests to freeze repayments or restructure its outstanding debt to them. After initial reluctance, Colombo is now turning to the International Monetary Fund (IMF) — a popular policy prescription from the political opposition, think-tanks, and diplomatic missions. The move, they say, will boost Sri Lanka’s global credit rating, which fell sharply last year, and enable new borrowings internationally.

Even if IMF support, possibly amounting to a few billion dollars, comes through in some time, Sri Lanka is far from recovery, analysts caution. “IMF support is critical at this time for some relief, but they will ask the government to cut expenditure and increase tax revenue,” contends K. Amirthalingam, Professor of Economics at the University of Colombo. “I am not sure this is the right time for raising taxes when people’s purchasing power is so low and they are already suffering.”

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There are at least 5 lakh “new poor” people in Sri Lanka after the pandemic, the World Bank stated in a recent report, warning that Sri Lanka’s “relatively high levels of inequality” pre-pandemic are likely to grow. As will poverty, especially with no universal social security or public distribution system, which was systematically dismantled after Sri Lanka liberalised its economy in 1977. Successive governments saw these as redundant in the ‘growth story’ that they were optimistically scripting through those decades. Today, all that remains is free public education until university, and the enviable public health system that proved vital during the pandemic.

People stand in queue to buy LPG cylinders in Rathgama, on March 27, 2022. Families are skipping tea and foregoing meals, queuing up for hours to buy cooking gas or kerosene, and coping with day-long electricity cuts in sweltering heat as they suffer an unprecedented economic crisis.
| Photo Credit: AFP

The monthly allowance — revised recently up to LKR 4,500 (roughly ₹ 1,160) — under the government’s targeted cash assistance programme, Samurdhi, is “barely enough to buy a gas cylinder,” says Professor Amirthalingam. The LKR 5,000 (about ₹1,290), from a “relief package” announced by the government for the months of April and May, is a pittance when prices soar on a daily basis. In his view, despite Sri Lanka’s open economic policy since the 1970s, no government focused enough on diversifying exports or reducing the country’s import-reliance. “We are an island, and we import tinned fish,” he scoffs, pointing to an “abject policy failure”.

Back to the past?

The promise of a liberalised economy in Sri Lanka began half a century ago. It emerged as a compelling counter to then Prime Minister Sirimavo Bandaranaike’s import restrictions, also in response to a foreign exchange crisis, resulting in an acute shortage of food and essentials. “Produce or perish” she told the country at the time.

In their current predicament of waiting in long lines, many see a playback of the early 1970s. The public disaffection over Bandaranaike’s economic policy led to the emphatic 1977 poll victory of J.R. Jayewardene as President. He opened the Sri Lankan economy to the private sector, foreign trade, and capital movements, setting a regional precedent. In doing so, he irreversibly altered the island nation’s economic path. No successor government would choose to change this even if it spoke the language of welfarism from the electoral podium, like the Rajapaksas.

In this file photo taken on August 9, 2020, Sri Lankan President Gotabaya Rajapaksa (right) swears in his elder brother Mahinda Rajapaksa (left) as Sri Lanka’s new Prime Minister at the Kelaniya Raja Maha Vihara temple outside Colombo. The Sri Lankan government, which has four Rajapaksa brothers and one son in the Cabinet, in addition to other family members in prominent positions, is facing what is arguably one of the worst economic crisis in the island’s history.
| Photo Credit: AFP

The Rajapaksa brand, built mostly by the eldest of the brothers, former two-term President and current Prime Minister Mahinda Rajapaksa, defies a neat ideological label in its economic policy. The Rajapaksas’ social welfarism as patronage politics and resistance to privatisation has coexisted with a steadfastness to Sri Lanka’s traditional export basket and ready embrace of big capital, even if in state-led projects.

During Mahinda Rajapaksa’s first term, the government shunned multilateral loans that came with conditions. It instead opted for high-interest loans from bilateral partners or through sovereign bonds, to fund mega infrastructure projects in a country that was still at war. Just after the war ended in 2009, Sri Lanka saw a mini economic boom, buoyed by the construction of expressways and other road projects, a mega port, and an airport, most of which are yet to generate revenue to even meet the operating costs.

When Gotabaya Rajapaksa ran for Presidency a decade later, he promised to resurrect the country’s “neglected” villages and to pursue “people-centric” economic development. But his rash ban on chemical imports for agriculture crushed any hope that farmers had of sustaining production and income during the pandemic. People’s distress has only grown in the past two years.

The overnight switch to organic farming was not the only injudicious move of the government. In late 2019, it substantially cut indirect taxes, while shrinking the income tax net, and caused a drastic cut in government revenue. It took hardly any time for the pandemic, arriving months later, to accelerate the downturn. Self-assured of its political might, the ruling administration appeared unperturbed by the fast-unfolding economic calamity. Even staunch supporters now see the Rajapaksas’ disastrous misgovernance as a reflection of the leaders’ overconfidence and disconnect with the public that once adored them.

Political cost

Meanwhile, the poorest are bearing the heaviest burden of the crisis that will likely deepen in the coming weeks. Last Sunday, domestic worker M.Y.N. Zuhira stood in a queue for four hours in the sun for a gas cylinder. “At least I got it,” she says, from her home in Dematagoda. With a daily wage of LKR 800 (roughly ₹205), she cannot eat three meals a day unless she pools her earnings with a relative next door. “That way, there is a little more rice for all of us,” she says.

People wait in queue to buy diesel at a Ceylon Petroleum Corporation fuel station in Colombo on March 31, 2022.
| Photo Credit: AFP

The economic crisis has hit the urban poor the hardest, but it has not spared most others. Many from Colombo’s English-speaking elite, who otherwise scorn protests as a “nuisance to the public”, are now regulars at daily and weekly protests on the crisis, demanding better leadership and solutions. In mid-March, 16 Tamils from the war-affected north fled to Tamil Nadu claiming destitution.

Immigration authorities have noted the sharp increase in applications for new passports — some 1,61,394 since January this year — as scores of young men and women from working families try going abroad for domestic or construction work. “So many people I know in our village are preparing to leave the country. Two of my relatives are going to Saudi [Arabia] and Qatar. They see no future here,” says Kalidasan. “The government might keep a lid on essential food prices until Sinhala-Tamil New Year in April. After that, it might just go out of control.”

Asking not to be named fearing “repercussions”, his boss says, “The coronavirus hit all countries in the world. But the crisis is affecting only us. Then whose fault is it really? The leadership only.”

If the public resentment is any indication, the Rajapaksas will have to pay a price. But in the absence of an impending election, it remains to be seen if the popular anger now transforms into a real political challenge. The fragmented and reactive political opposition seems to be gaining strength and momentum in recent weeks, seen in the large rallies of the main opposition party, the Samagi Jana Balawegaya, which occupies less than a fourth of the 225 seats in the legislature, and the leftist Janatha Vimukthi Peramuna.

Two critical factors over the next few months will determine Sri Lanka’s economic revival and the regime’s political fortunes: President Gotabaya’s ability to arrest the devastating impact of the crisis, and the opposition’s chances at winning the people’s confidence as a credible political alternative.

Even now, there is nothing to suggest that the government has a strategy going beyond the next few days or weeks. Its response to the enormous challenge so far is, at best, piecemeal. The political costs of this crisis will affect just the Rajapaksas, but the economic aftermath will be the country’s to bear.