Conflict Alerts

Conflict Alerts # 530, 14 July 2022

Sri Lanka: Continuing economic crisis
Nimmi Jayathilake

In the news
On 9 July 2022, an estimated 100,000 protestors demanding the resignation of President Gotabaya Rajapaksa gathered outside his official residence. They swarmed in by breaching the security barricades and entered the President’s house.

The protestors also broke into the Prime Minister’s official residence (the Temple Trees); his private residence was set on fire. Later, Sri Lanka’s speaker Mahinda Yapa Abeywardene announced the decision of President Gotabaya Rajapaksa to resign.

Issues at large
First, the compounded economic crisis. Allegations were mainly on mismanagement of economy and inflation. Beyond accusing the Rajapaksas of corruption, reports condemn the economic mismanagement by successive governments that has weakened Sri Lanka’s public finances; this, in turn, has led to excess levels of national expenditure and a deficit in the production of tradable goods and services.  The situation worsened when deep tax cuts were initiated when Rajapaksa returned in 2019.  A few months later, the COVID-19 pandemic struck; the pandemic demolished most of Sri Lanka’s revenue. The industry was affected the most, including the productive tourism. Besides, the remittances from abroad dropped; rising levels of the foreign exchange rate further compounded Sri Lanka’s economic crisis.

Second, the depletion of foreign exchange reserves, following deficit and bad credit ratings. The rating agencies grew apprehensive about government finances in Sri Lanka and its inability to pay large foreign debts; this, in turn, reduced Sri Lanka’s credit ratings from 2020 onwards. Sri Lanka got locked out of financial international markets. To balance the economy, the government utilized its foreign exchange reserves consuming by more than 70 per cent within two years.

Third, the failure to take timely remedial. It failed to initiate productive measures to prevent the economy from deteriorating further, including the initial holding off talks with the IMF. The opposition leaders and financial experts urged the government to take measures since 2020; the government did not respond to them, hoping post-pandemic, the remittances would retrieve and tourism industry get revived.  Later, when it was evident that the crisis was worsening, the government was compelled to seek aid from countries like India and China. India responded by distributing billions of dollars in loans to help pay for important supplies; China stated that it would help restructure the island nation’s debt. Sri Lanka had to eventually open talks with IMF during its worst stage.

In perspective
First, people should elect a new government with a new constitution. The new government should comply with the basic needs of Sri Lankans and should stabilize ways to pay off the country’s remaining debts. The new government should negotiate closely with international institutions such as the IMF, G7 and World Bank, willing to help restructure the country.

Second, selecting the right people for the right job. The Rajapaksa regime was known for appointing people unqualified or those related to the Rajapaksas. The new government should appoint people with experience and the educational qualifications that are required.

Third, Sri Lanka should reconsider the Executive Presidency; power and functions should be distributed within the parliament.

Fourth, following up with the mistakes of the previous regime. The new government should recover the stolen funds and be used to pay off the country’s outstanding debts.

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