How Sri Lanka's Economic Crisis Led To Implosion Of Its Polity

In the biggest demonstration so far, protestors in Sri Lanka on Saturday stormed President Gotabaya Rajapaksa’s residence while thousands of people took to the streets of Colombo as the county’s economic crisis worsened.

Demonstrators, who have been protesting outside the President’s office for the past few months, stormed inside the premises and were reportedly seen jumping into the swimming pool, entering the kitchen and grabbing whatever they can to eat, and watching the news on the television.

Sri Lanka’s economy is in a state of collapse, while the country has sought help from International Monetary Fund (IMF), and neighbouring countries have also come to its aid, the political instability has only weakened any chances of economic revival for the country.

This has led to steep inflation, and severe shortages of essential items, leaving people struggling to buy food, fuel, and other necessities.

Much of the public ire has been pointed at the Rajapaksa family, with protesters blaming them for dragging Sri Lanka into chaos with poor management and allegations of corruption.

Let’s find out what exactly went wrong for the island nation:

How Did The Protests Start?

In April, Sri Lanka announced it is suspending repaying foreign loans due to a foreign currency shortage. Its total foreign debt amounts to $51 billion of which it must repay $28 billion by the end of 2027.

The same month, President Rajapaksa declared a state of emergency. In less than a week, he withdrew it following massive protests by angry citizens over the government’s handling of the crisis.

Sri Lanka defaulted on its foreign debts for the first time since its independence in April this year.

The turmoil has led to months of protests, which dismantled the Rajapaksa political dynasty.

The president’s older brother resigned as prime minister in May after violent protests, while three other Rajapaksa relatives had quit their Cabinet posts earlier.

A new prime minister, Ranil Wickremesinghe, took over in May to help steer the country out of the crisis while Rajapaksa continued to enjoy the power despite growing calls for him to quit.

On Saturday, as droves of people broke through barriers to occupy the president’s residence, hundreds of protesters, some carrying national flags, also stormed his seaside office in another nearby building.

What Are Protesters Demanding?

‘Gota! Go Home' – The people of the country are demanding the resignation of President Rajapaksa. On Saturday, the protests intensified after the demonstrators stormed his residence in Colombo.

The protests have been going on for months in the island nation of 22 million people which is witnessing the worst economic crisis since 1948.

The protesters demand the resignation of the president, and the prime minister.

Protesters blame the government for the mismanagement of the economy, which has sent prices of goods skyrocketing.

The beleaguered president is currently at military headquarters under army protection. Amid the ongoing protests, prime minister Ranil Wickremesinghe told political leaders that he is willing to resign for a new government.

How Severe Is The Crisis?

The country’s 22 million people are facing crippling 12-hour power cuts, and an extreme scarcity of food, fuel, and other essential items such as medicines.

Sri Lanka relies on the import of essential items including petrol, food items, and medicines. The prices of these items have gone up due to the shortage of foreign exchange in Sri Lanka.

Inflation is at an all-time high of 17.5 per cent, with prices of food items such as a kilogram of rice soaring to 500 Sri Lankan rupees when it would normally cost around 80 rupees. Amid shortages, one 400g packet of milk powder is reported to cost over 250 rupees, when it usually costs around 60 rupees.

The Story Behind The Crisis

A large share of its gross domestic product came from the foreign exchange earned from exports. Over the years, as exports declined, the country’s foreign exchange reserves have come under strain.

For this reason, Sri Lanka frequently encountered balance of payments crises.

The country has taken loans from IMF several times in the past to sail through the crisis.  However, the loans usually come with tough conditions such as reducing the budget deficit, maintaining a tight monetary policy, cutting government subsidies on food for the people of Sri Lanka, and depreciating the currency.

These conditions have led to more debt for the country

The last IMF loan to Sri Lanka was in 2016. The country received $1.5 billion for three years from 2016 to 2019.

The conditions were familiar, and the economy’s health was nosedived over this period. Growth, investments, savings, and revenues fell, while the debt burden rose.

The country’s tourism declined and the Covid-19 pandemic dented the economy even further. Moreover, the new government under President Gotabaya Rajapaksa irrationally cut taxes which led to the loss of revenues.

In April 2021, the Rajapaksa government banned all fertilizer imports and the country was declared a 100 per cent organic farming nation. The policy was withdrawn later last year but it led to a drastic fall in agricultural production and more imports became necessary. Due to lower export incomes, there was less money available to import food and food shortages arose.