How Sri Lanka Landed in a Political and Economic Crisis and What It Means

(Bloomberg) -- Sri Lanka’s street protests over soaring inflation and lengthy power cuts have shaken President Gotabaya Rajapaksa’s hold on power, with government ministers resigning while the opposition called for fresh elections in the South Asian nation. The political turmoil is complicating efforts to manage the island’s foreign exchange crisis and secure more funds to keep its tourism-reliant economy running, having already been hit hard by the Covid-19 pandemic.

1. How did the crisis start?

Rajapaksa carried out populist tax cuts in late 2019, reducing revenues just months before the pandemic devastated the economy, with international flights grounded and successive lockdowns ordered. Remittances from overseas Sri Lankan workers dried up as well as many lost their jobs. With foreign-exchange earnings plunging, Sri Lanka struggled to manage its external debt, which had grown in part due to loans from China to fund ambitious infrastructure projects. Even though Sri Lanka has received credit lines from neighbors like India, it has been unable to regularly pay for imports of fuel and essential foods. Making matters worse was Rajapaksa’s pivot last year to organic farming with a ban on chemical fertilizers that triggered farmer protests and saw production of critical tea and rice crops decline. 

2. What’s happening to the economy? 

The $81 billion economy is under severe pressure, with Russia’s invasion of Ukraine raising global oil prices. Sri Lanka’s growth is slow and inflation is at multiyear highs. The authorities have since raised interest rates, devalued the local currency and placed curbs on non-essential imports. But with a meager $2 billion in foreign exchange reserves and $7 billion in debt payments due this year, restoring the country’s economic health remains an uphill battle. Consumer prices rose nearly 19% in March from a year earlier, the fastest rate in Asia, after a 15% jump in February. 

3. Why are people protesting?

Sri Lankans, who voted Rajapaksa into the presidency three years ago, are finding themselves in increasingly difficult living conditions. Households and businesses have endured daily power cuts since March, with the duration stretching to 13 hours in April, as the government struggles to pay for energy supplies. There are long lines at gasoline filling stations and daily shortages of essential food items, which if available, are becoming prohibitively expensive. On March 31, protesters clashed with police outside Rajapaksa’s private home after a crowd surged past the barricades, screaming for him to step down.

4. How has the government responded?

Rajapaksa, who usually reacts with issuing extraordinary gazettes late at night, declared an emergency and imposed a weekend curfew through April 3. The government also restricted access to social media platforms including YouTube, WhatsApp and Facebook for about 13 hours, a move it said was needed to preserve social order. Critics said it was to prevent the protests from spreading. Demonstrations continued despite the curfew as Sri Lankans kept chanting “Gota go home,” which became a trending hashtag on Twitter. Rajapaksa, who holds sweeping executive powers based on a 2020 constitutional amendment, has reached out to the opposition with an offer to work together to resolve the crises. Opposition leaders were instead talking about holding fresh elections and repealing the amendment. 

5. What’s the bigger picture?

The country, off India’s southern tip, has struggled with conflict since gaining independence from Britain in 1948. Civil war between the Sinhalese-dominated government and the separatist Liberation Tigers of Tamil Elam went on for decades and killed 100,000 people. The war ended in 2009 with a government victory -- and allegations of human rights violations on both sides. There was a lull in violence until the 2019 Easter Sunday suicide bombing attacks, which killed more than 200 people and the government blamed on a little-known Islamic group. Rajapaksa, a former military officer whom many voters view as a hero of the civil war, was elected president months later. Sri Lanka has also become a battleground in which China and India compete for influence. Rajapaksa and his family members in government have shifted the country closer to Beijing. However with approaching maturities and interest repayments keeping policy makers on their toes, Sri Lanka has reached out to India for aid. On April 12 it warned creditors of a possible default and suspended payments on some foreign debt. The finance ministry also said it would expedite talks with the International Monetary Fund for an aid package. The Rajapaksa government has had a deep-seated reluctance to ask for IMF help since it can involve unpopular austerity measures.

The Reference Shelf

• More QuickTakes on Sri Lanka’s 2019 Easter bombings and its 2018 political crisis.
• Bloomberg Intelligence reports on the inflation risks.
• Bloomberg Opinion’s Ruth Pollard asks if the Rajapaksas will listen to the street, and Andy Mukherjee looks at what rising oil prices mean for Asia.

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