Sri Lanka, known as the “tear drop of the Indian Ocean”, is really full of bitter tears in recent times. After the worst economic crisis in 70 years and protesters stormed the executive residence, the president of the country, gothabaya Rajapaksa, and the prime minister, Vikram masinha, both said they would resign. With the retirement of the two political veterans, the future of this island country with a population of 22million has attracted more and more attention.
The analysis shows that the chaos in Sri Lanka is closely related to the profound evolution of the international situation, improper domestic governance, and the country’s long-term economic structure. Its experience also sounded an alarm for other troubled emerging economies.
Sri Lanka, which had a good economic performance four years ago, how did it come to this situation step by step?
On July 9, 2022 local time, in Colombo, the capital of Sri Lanka, a large number of protesters gathered near the presidential palace. The scene was chaotic, and the police sprayed tear gas to disperse the protesters. Source: surging image
Wen | Zhang Quan
This article is from Shangguan news app. The original text was first published on July 10, 2022, and the original title was “national bankruptcy, President and prime minister resign, where is Sri Lanka going?”.
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A heart wrenching scene
If we turn back the clock for four years, the outside world may not think that Sri Lanka will come to this stage.
In 2018, as a dynamic emerging economy in South Asia, Sri Lanka’s performance was impressive. The per capita gross domestic product (GDP) of the country is about 4100 US dollars, twice as high as that of India. Employment rate and bank robustness indicators are also commendable. However, in less than four years, the “sudden change in painting style” of the formerly prosperous country cannot help but amaze people.
“At present, Sri Lanka is a country in the most serious economic crisis in more than 70 years.” CNBC, the US financial media, pointed out that inflation has risen to record levels, food prices have soared, foreign exchange is drying up, and power and oil supply are tight… The Prime Minister of the country recently announced that “the country has gone bankrupt”, saying that “the unprecedented economic crisis will continue until at least the end of 2023.”
Under the crisis, people’s livelihood is more difficult. Media footage recorded a disturbing scene: the mother kneaded the rice ball and mixed it with lentils and spinach, which may be the only meal of the day for her and her children. Considering that food prices rose by 80% in June alone, it is not surprising that they are so embarrassed. According to the United Nations Children’s fund, Sri Lanka is on the brink of humanitarian crisis, and 70% of households have reduced their food intake since the beginning of the year.
In addition to grain, fuel and essential drugs inventories are also rapidly bottoming out. On the road, there are several kilometers of queuing refueling teams everywhere
“Poor food”, “unable to move”… The grievances of ordinary people with limited life are rising, and the spearhead is directed at the leadership. Since this year, they have protested on the streets for many times, which forced the then Prime Minister Mahinda Rajapaksa to step down in May. A few days later, Vikram masinha was the general reason. He was also the Minister of Finance and led the rescue negotiations between Sri Lanka and the International Monetary Fund (IMF).
However, the change of prime minister did not turn the tide. On the 9th, angry demonstrators occupied the presidential residence, the presidential office and the prime minister’s office. They jumped into the swimming pool of the presidential palace and burned the prime minister’s office to vent their dissatisfaction. The protesters also clashed with the police, injuring at least 55 people.
In the face of strong public pressure, the president and Prime Minister both announced that they would resign, including gothabaya Rajapaksa, who would resign on the 13th. According to the constitution, the speaker of Parliament will act as president for no more than 30 days. Within 30 days, Parliament will elect members as president to complete the remaining two-year term.
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Multiple blows
From the excellent economic performance in the past to the double turbulence in the political and economic fields, how did Sri Lanka come to this situation step by step?
Hu Shisheng, director of the South Asia Institute of the China Academy of modern international relations, believes that there are both external reasons for the profound evolution of the international situation and internal factors for the improper governance of Rajapaksa. In contrast, the former is the more important driver.
Hu Shisheng believes that several things have a direct impact on the economic governance of the current regime.
First, the serial bombings in Sri Lanka in 2019, which caused about 800 deaths and injuries, dealt a heavy blow to the country’s tourism industry. At that time, although Rajapaksa was not yet in power, it undoubtedly posed a test for him to revitalize the economic pillar in the future.
Second, the outbreak of the COVID-19 in 2020 hit the country’s economy from multiple dimensions – not only hurting the tourism industry, but also bringing a large number of foreign workers back to China, resulting in a sharp decline in the income of overseas Chinese remittances. The epidemic also triggered a “Blackout” in the industrial chain, which greatly affected the export of tea and the medium and high-end textile industry on which the country’s economy depends.
Third, since the conflict between Russia and Ukraine, global inflation has intensified and food and oil prices have soared. For Sri Lanka, which needs imported materials to meet national needs, this means that foreign exchange will be sharply consumed. In addition, the capital outflow caused by the tightening of monetary policy by the Federal Reserve has also made the situation more serious.
“These incidents have hit President Rajapaksa in three consecutive attacks.” Hu Shisheng said that, in fact, since he became president in 2019, Rajapaksa has obvious political advantages – he has his own historical achievements and prestige in ending the civil war. In the 2020 parliamentary election, his people’s Front Party won nearly two-thirds of the parliamentary seats with an absolute advantage. In addition, infrastructure projects to revitalize the tourism industry are also advancing, so he is waiting for “the door to open”. “Everything was ready at first, only due to the east wind. But in the end, the east wind did not wait, and an evil wind came. The political advantage was not translated into governance effectiveness in time.”
On the other hand, improper economic decisions and slow adjustments have also made the crisis worse.
After taking power in 2019, the Rajapaksa government implemented large-scale tax cuts, resulting in an annual loss of income of more than $1.4 billion. Another controversial policy is to try to ban the import of chemical fertilizers, but with the large-scale failure of rice harvest in 2021, Sri Lanka had to spend money to buy grain from abroad. In November last year, although the ban on chemical fertilizers was lifted, it has had an irreparable impact on the production of grain, tea and rubber.
Lin minwang, deputy director of the South Asia Research Center of Fudan University, pointed out that Sri Lanka’s economic structure and policy preference for “debt development” were also the triggers of the crisis.
From the perspective of economic structure, Sri Lanka is dominated by agriculture (fishery), primary processing industry and general service industry. In the face of big storms, Sri Lanka has limited room to move and is very dependent on external markets. When the risk exposure is opened, the accumulated debt will often become the last straw to crush the country. It is reported that the external debt of the Sri Lankan government has reached US $51billion. With the downgrade of its sovereign credit rating, it is more difficult for it to “get married” in the international market, resulting in a vicious circle in its exchange rate, foreign exchange and other aspects.
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“Alms” difficult
The question now is, can Sri Lanka’s situation change after the two leaders “abdicate”? What are the domestic political trends and economic prospects?
Hu Shisheng believes that Rajapaksa and Vikram masinha can be called veterans in the political arena. The former comes from a powerful political family, and the latter has served as Prime Minister five times. If these two big men are difficult to clean up the mess, it is conceivable that the task of other families and forces is heavy.
Hu Shisheng judged that Sri Lanka’s “political reshuffle” will be manifested in several aspects: first, the prestige of the Rajapaksa family will be hit – the memory of the six-month economic shutdown left by the people is too deep, and I’m afraid it will take a long time to resolve. Second, it is more likely that technocrats with non family backgrounds will be elected to leadership positions in the two major parliamentary parties in the future. Rajapaksa may retreat behind the scenes and seek national development plans with the rulers.
Lin minwang believes that the opposition is clearly taking advantage of Sri Lanka’s economic difficulties to oust the Rajapaksa family at one stroke. After he steps down, the United States is likely to use interests as bait and use the Western led international organizations and economic governance structure to woo Sri Lanka and serve the “Indo Pacific strategy”.
From the perspective of economic prospects, Hu Shisheng believes that Sri Lanka has a certain economic foundation and is in an important strategic position of “the crossroads of the Oriental sea”. Some infrastructure construction projects have been completed and need to be “recovered”. If we can breathe a sigh of relief through the “emergency” of the outside world, the prospect of sustainable development in the future is promising.
But now the biggest question is whether there can be politicians in the country who dare to take the risk of failure and lead the people to tighten their belts and spend the most difficult days. “Sri Lankan people should realize that the more the country is in turmoil, the more doubts about international aid forces will intensify; the longer the economic shutdown, the greater the probability that the industrial chain will be transferred and replaced. Therefore, political stability is undoubtedly the most important. As for the economic situation, I think it may take at least a year to ease.”
At present, Sri Lanka is also “self-help” in many ways, including considering the privatization of state-owned airlines, seeking loan assistance and debt relief from some countries and international organizations, and seeking cheap energy supply from some countries. At present, India has promised to provide about $3billion in aid loans, credit lines and credit swaps. The Iranian government has agreed that Sri Lanka “pays tea in installments” – paying off oil debts by delivering tea. The IMF will continue negotiations with Sri Lanka on a $3billion aid package and is expected to reach a preliminary agreement later this summer.
Public opinion believes that the funds Sri Lanka can obtain at present are far from the amount needed to maintain its operation in the next six months. Whether it is a short-term bailout or the four-year “comprehensive loan assistance program”, the IMF may set more stringent conditions. “Life saving money” may become a heavy burden.
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Sound the alarm
The crisis in Sri Lanka also sounded an alarm for other troubled economies.
Since March, Turkey, Egypt, Tunisia and other countries have experienced high inflation, plummeted exchange rates and faced debt default.
In early April, Lebanon declared its central bank and government bankrupt. The situation in Latin American countries is also not optimistic. Ecuador, Uruguay and other countries in many regions have debt ratios far exceeding the international security line of 20%. Other risk countries listed by the associated press include Myanmar, Laos, Pakistan, etc.
A report released by the United Nations global crisis response team last month showed that about 1.6 billion people in 94 countries are facing at least one aspect of the crisis in the food, energy and financial systems, of which about 1.2 billion people are in “perfect storm” countries, and are highly vulnerable to the cost of living crisis and other long-term pressures.
“The population suffering from high food prices and supply shortages may become a powder keg for political instability.” Bloomberg wrote. So, will Sri Lanka cause domino effect?
Hu Shisheng believes that some smaller economies have a single economic structure. If the stability and control of the government itself are relatively poor, it is easy to show its vulnerability under international storms. In this sense, Sri Lanka’s experience should not be an isolated case. This year, only in South Asia, many countries have shown signs of internal instability. If it continues to develop, I’m afraid a similar situation will occur in Europe. However, it should also be noted that if a country is located in a region with a relatively complete industrial chain, the risks encountered by the country are still expected to be resolved through assistance.
Some analysts pointed out that in view of various systemic risks, emerging economies should adjust their economic structures, boost domestic demand, and improve macro Prudential policy regulation. At the same time, we should give full play to the role of the G20 and other multilateral platforms, strengthen macroeconomic policy coordination, and build a strong breakwater for political and economic stability.