After a month of intense protests led by civilians over Sri Lanka’s deteriorating economy, President Gotabaya Rajapaksa agreed on Friday to appoint a new council to lead the formation of the interim government. The resolution would create a coalition of all parties in parliament and remove the grip of the Rajapaksa dynasty that currently rules the country. It is about the economic future of a country in disarray after failing to repay its hills of foreign loans – estimated at $ 50 billion – first time since the country gained independence from the british in 1948.
Signs of Sri Lanka’s impending economic crisis have become increasingly apparent in the last two years of the Covid-19 pandemic. food prices have risen and power outages increased frequency. Sri Lanka currently has about $ 7 billion in total debt this year.
Many attribute Sri Lanka’s economic crisis to poor financial management by successive governments through growing external debt and continued investment in infrastructure. The Rajapaksa administration has also implemented it sharp tax cuts in 2019by reducing the rate of value added tax (VAT) – a tax applicable to imports and domestic supplies – from 15 per cent to eight per cent, which has contributed to a reduction in the country’s revenue.
The president’s older brother, Mahinda Rajapaksa, is expected to be removed as prime minister under an agreement brokered by former President Maithripala Sirisen, who defected with dozens of other members of the current president’s ruling party in April to protest against poor Rajapaksa’s rule.
But the power struggle in the country may have sown discord between the two brothers, which could worsen its political stalemate. Friday is the Associated Press logged in a spokesman for the prime minister did not immediately confirm the removal of the elder Rajapaksa, saying all such decisions would be announced by the prime minister in a timely manner.
The country has continued to increase its external debt without sufficient revenue
Much of Sri Lanka’s economic woes are its growing external debt, or financing its aggressive turn towards infrastructure development under former President Mahind Rajapaksa, Rajapaksa’s older brother and double prime minister. As its finances are already bleeding, Sri Lanka has taken large investment loans from state-owned Chinese banks to finance its infrastructure projects, including the controversial development of a port in Hambantota district.
The Sri Lankan government has justified the Hambantota project as a way to develop its economy as a bustling trading hub comparable to Singapore. However, the project was riddled with corruption and stopped, and eventually Sri Lanka handed over port control China as collateral after it was unable to repay its loans.
Over the past decade, Sri Lanka has accumulated $ 5 billion debt to China alone, makes up a large part of its total external debt, according to the BBC. Sri Lanka’s inflated debt to China and the failure of the Hambantota project are often cited as examples of China’s “debt book diplomacy” in recent decades.
Some believe China has expanded this approach to monetary diplomacy through its ambitious Belt and Road Initiative (BRI), a global infrastructure project that involves Chinese infrastructure development investments in parts of Asia, Africa and Europe that pay off as part of China’s efforts to increase global influence as a growing economic power. About 139 of the 146 countries in the world, including Sri Lanka, have signed the Chinese BRI project. While an infrastructure project at such a global level may provide some economic benefits to participating countries, the BRI has inevitably become a strategic way for China to gain political leverage with economically vulnerable countries across the Asia-Pacific region. At least 16 countries involved in the BRI project are burdened with billions of dollars of debt, which China then used independent analysis by Harvard Kennedy School for the U.S. State Department.
Oh 22 percent of Sri Lanka’s debt owes to bilateral creditors – institutional investors from foreign governments – according to CNBC. Neighboring India has sought to increase its bilateral cooperation with Sri Lanka in part in an attempt to secure its influence in South Asia over China. India recently gave Sri Lanka a $ 1.5 billion credit line to address the country’s fuel crisis, with another $ 2.4 billion through currency swaps and loan delays since January.
As the country has accumulated foreign debt, its tourism sector – before an industry worth $ 44 billion and the primary source of income for the island – he had successive hits. In 2019, tourism suffered after that a series of church bombings in which nearly 300 people were killed, including some foreign nationals.
The following year, the Covid-19 pandemic halted tourism and other major sectors, fueling a global economic downturn. Although Sri Lanka saw a slight increase in foreign visitors last year, the ongoing pandemic combined with Russia’s invasion of Ukraine – both nations leading sources of tourism for Sri Lanka before the conflict – continued to slow the industry’s recovery.
The worsening crisis has sparked mass protests
The country’s problems escalated in March when the Sri Lankan government announced 13-hour daily power outages as a way to save energy in the midst of the ongoing crisis. Without enough electricity, many were unable to do their jobs as the economic crisis continued, sparking mass unrest. Thousands of Sri Lankans took to the streets in the weeks after the power outage in protest of the country’s growing crisis.
On April 1, President Rajapaksa declared a state of emergency due to growing unrest saw clashes between protesters and police. The entire cabinet of the Government of Sri Lanka resigned in protest shortly after the emergency law was implemented, prompting Rajapaksa to repeal the law. Among those who resigned was Sports Minister Namal Rajapaksa, another member of the Rajapaksa family and the president’s nephew.
With growing political unrest and no solution in sight, Rajapaksa’s rivals began calling for a vote of no confidence in his administration.
“We are convinced that we have the numbers and that we will submit the request in due time,” opposition MP Harsha de Silva said. said CNBC. Hoping to appease critics, President Rajapaksa sought to form a new coalition of unity under his leadership, but failed to gain support. In April, the government also announced it would temporarily suspend foreign debt repayments, the first time Sri Lanka has not repaid foreign loans since its independence.
Experts have been warning for some time about the potentially difficult situation regarding the country’s finances. When the country went bankrupt, the government was negotiating a rescue plan with the International Monetary Fund, which found its accumulated debt unsustainable.
“The government intends to continue its talks with the IMF as soon as possible in order to formulate and present to the country’s creditors a comprehensive plan to return Sri Lanka’s foreign public debt to a fully sustainable position,” the finance ministry said in a statement. statement.
At a meeting with cabinet officials a week later, President Rajapaksa recognized the role of his government in the economy of a declining country. In particular, the president said that the government should have turned to the IMF earlier for support in resolving its disobedient foreign debt and that the ban on the import of chemical fertilizers, which aimed to preserve Sri Lanka’s foreign exchange but should harm it instead, should have been avoided. agricultural production.
“Over the last two and a half years, we have had huge challenges. “The Covid-19 pandemic, as well as the burden of debt and some mistakes on our part,” Rajapaksa said.
Now, Sri Lanka’s future depends on whether the president’s changes to the government he proposed will calm his growing opposition long enough for a solution to come from the IMF. Sri Lankan Finance Minister Nandalal Weerasinghe said such an agreement could for months to comeHowever.