Demonstrators celebrate after entering into the Presidential Secretariat, after President Gotabaya Rajapaksa fled.
Sri Lanka’s President Gotabaya Rajapaksa and Prime Minister Ranil Wickremesinghe have said they will resign for an all-party interim government to take over. Thousands of demonstrators entered the palaces of both men in Colombo over the weekend as the bankrupt island nation slipped deeper into its worst economic crisis. Visuals showed protesters lounging on beds and upholstered chairs, swimming, working out, playing the piano and gorging on good food. It was also a heartbreaking glimpse of the lifestyles the political elite had. At the same time, a country of 22 million people remains denied, for months, some of the most essential items there could be for survival. Rajapaksa and Wickremesinghe have not been seen in public since Friday. In May, eight people were killed and more than 200 wounded as weeks of demonstrations escalated into bloodied clashes between groups supporting and protesting the government. Mahinda Rajapaksa had to resign as prime minister. Mahinda’s younger brother, Gotabaya Rajapaksa, rejected violent calls for his resignation and appointed Ranil Wickremesinghe as the new prime minister.
But this has clearly not worked. Sri Lanka has almost run out of dollars to import fuel, further stretching queues of people jostling with each other to buy cooking gas, besides petrol and diesel. Inflation has gone through the roof. The unrest is also fuelled by an acute shortage of food, medicines, electricity and other essentials. But similar situations may be unfolding in many other countries.
THE LANKA CRISIS
Before we move on to them, a quick look at what plunged Sri Lanka into such chaos. The Rajapaksas ruled Sri Lanka’s political scene amid charges of oppression, nepotism, and corruption. But the main trigger was the economic mismanagement, worsened by counter-productive Chinese loans. Eventually, the country defaulted on its debt in May.
- Sri Lanka focused on domestic markets instead of selling goods abroad. So, export incomes remained low, and import bills kept growing.
- In April 2019, the Easter Sunday terror attacks hit Sri Lanka’s tourism industry, one of its biggest foreign currency earners. The import-reliant nation was to soon begin to struggle to source goods.
- In November 2019, President Gotabaya ordered sweeping tax cuts that meant a loss of one million taxpayers and massive revenue in a country already crippled by chronic budget deficits.
- Then came the Covid-19 pandemic that dried up the inflow of tourists and depleted foreign currency reserves, causing Sri Lanka’s debts to spiral.
- In 2021, the government tried to stop the outflow of foreign currency by banning chemical fertiliser imports. It asked farmers to use organic fertilisers instead.
- This sparked colossal crop failures. Buying food stocks from abroad made the foreign currency shortage worse.
But what happens in one country does not necessarily stay in that country. Many other debt-laden nations face similar food and fuel shortages amid high inflation.
Take, for example, Pakistan. It somehow avoided a debt default recently, with its soaring fuel-import bill and depleting foreign-exchange reserves needed for exports. A total economic collapse in Pakistan will be more worrying for the world because of multiple factors: fundamentalism, nuclear weapons and the presence of the Taliban within the country and in its immediate neighbourhood. Like Sri Lanka, Pakistan has asked for a bailout from the International Monetary Fund (IMF) while frequently asking its people to pay more for gasoline and electricity.
In June, a Pakistani minister triggered a storm on social media by recommending that people reduce their daily cups of tea to help curtail the country’s import bill amid a rising economic crisis. Pakistan’s all-weather friend China gave a $2.3 billion loan. But not only these loans cannot provide a long-term solution, but they are also part of the problem. And this was seen even in Sri Lanka’s case.
- China’s investments in infrastructure projects, or debt-traps, deepened Chinese influence over Sri Lanka but also exacerbated the South Asian island nation’s economic crisis.
- Sri Lanka borrowed heavily from China to plug years of budget shortfalls and import goods needed to keep the country running.
- But it wasted large amounts on building expensive and unviable aviation, shipping, highway, hospitality, and other such facilities that further squeezed public finances.
- And much of what was built remains abandoned after making huge losses and failing to service Chinese loans that kept growing in size.
- Only China, Sri Lanka’s biggest bilateral lender, is the winner. Contracts went to Chinese companies and China gets the real estate in the form of equity.
Sri Lanka is in talks with India, Japan, and China and has appealed to even at-war Russia for help. Till now, India has provided around $3 billion worth of assistance to Sri Lanka, including a $400 million swap and credit lines amounting to $1.5 billion. But this is not what China does.
Meanwhile, along with Sri Lanka, Argentina, Venezuela, Zambia and others have also defaulted and many more are likely to follow, with a visible Chinese connection. For example, it’s difficult to miss a $360 million project to expand the international airport in Zambia. Like Zambia, Lebanon — where a financial meltdown has led to crippling blackouts and medicine shortages — has sought global assistance to restructure its loans.Burdened by debts, Laos is also reeling under high inflation, currency collapse and dollar shortages that have resulted in runaway increases in prices of consumer goods and energy. Covid remains a factor in most emerging economies taking a hit but the Chinese hand is omnipresent.
China employed its devious ‘Debt Trap Diplomacy’ to gain a strategic edge over Sri Lanka, independent foreign policy think tank Red Lantern Analytica said on Saturday.
But it’s not just Sri Lanka. Laos owes $13.3 billion in sovereign debt, much of which has gone into building large-scale infrastructure projects, many backed by China. No wonder, the Sri Lankan chaos has extracted sharp reactions from the IMF chief and a warning to G20 nations on global debt.
IMMEDIATE TRIGGERS & WHAT NEXT
But, indeed, there have been more immediate triggers. Russia’s invasion of Ukraine and high US interest rates have made fuel and other imports more expensive and led to spiralling inflation. Countries with a massive loan burden are naturally the worst hit. These factors also deepened Sri Lanka’s economic crisis that has now morphed into a full-blown political unrest, even though not many know which particular groups are protesting.
Many countries are doing what Sri Lanka did. In Europe, Germany Greece, Spain, and Portugal have announced tax rebates and energy subsidies to quell unrest. In Africa, Nigeria and Zambia have done the same. In Asia, the Philippines, Singapore and Indonesia are boosting social spending and giving out direct cash. But experts feel the scramble to cushion the blow with such measures may actually widen the chaos.