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Why Is Sri Lanka Facing Crisis Now?

Why is Sri Lanka facing a crisis now? There are various reasons, from economic mismanagement to the COVID-19 pandemic to China’s economic relations with Sri Lanka, which all combine to make this country very unstable. But there’s one common thread that ties these issues together: the Rajapaksa government. This authoritarian regime, ensconced in power since 2006, has allowed this crisis to develop and worsen.

Economic Mismanagement

The country has been ravaged by a series of power outages, which are meant to conserve energy and fuel. Protesters have occupied the capital for months calling for President Rajapaksa’s resignation. They’ve been met with tear gas from police and the backlash of supporters of the former president. The international community has pledged to help, and India and China have stepped in to lend a hand. The International Monetary Fund has even arrived to discuss a possible bailout with the Sri Lankan government. The government has also sent ministers to Russia to discuss discounted oil imports.

The country’s crisis results from inherited problems and economic mismanagement. COVID-19 devastated the tourism industry and disrupted the flow of payments from Sri Lankans abroad. Meanwhile, the government took on massive debts and cut taxes in 2019.

The Genesis of the Crisis

This left the country with huge liabilities and an eroding foreign exchange reserve. The consequences of this mismanagement are felt by ordinary Sri Lankans, who have to wait days for cooking gas and petrol queues extend for two kilometers.

The government’s need to increase revenues prompted the implementation of ill-conceived policies. As a result, foreign debt ballooned – Chinese loans financed some projects. The government pushed through some of the country’s largest tax cuts in history to address these issues, triggering massive punishment from the global market. In addition to these measures, the country’s debt ratings were lowered, blocking the government from borrowing money. Furthermore, the country’s economic performance has been adversely affected by a severe pandemic, which decimated the tourism sector and drove up rice prices.

COVID-19 Pandemic

In response to the COVID-19 pandemic in Sri Lanka, the Government of Sri Lanka (GoSL) has introduced a plan to contain the disease. The response plan consists of four strategic objectives:

  • Prevention of secondary infections among close contacts
  • Minimizing transmission amplification events
  • Optimizing care for seriously ill patients
  • Communication of critical risks

It was important to note that the GoSL’s plan is based on a multi-sectoral approach and involves the Sri Lankan Army, police, and State Intelligence Service.

The GoSL implemented strict and proactive measures to prevent the spread of the disease in the country. They banned public gatherings, closed universities and education centers, and halted essential services. They also imposed a 24-hour curfew on the island and permitted residents to work from home. However, a few countries showed a high risk of the disease. While most countries could still report cases, only a few showed high levels of risk for COVID-19.

The outbreak of COVID-19 in Sri Lanka triggered a widespread shutdown of most of the country’s economy. The outbreaks occurred in boarding houses and several factories. Labor rights activists claimed that employers were under-testing their employees and reported lost pay and benefits when they fell ill. Despite the closure of the economy, this situation was exacerbated by human rights abuses and poor working conditions.

China’s Economic Ties with Sri Lanka

After the end of the civil war in 2009, Sri Lanka embarked on a massive infrastructure drive with the help of China. The Chinese government pumped money into the country, building roads, airports, and ports. Sri Lanka has emerged as a crucial hub in the Belt and Road Initiative and Maritime Silk Road. China’s closer relationship with Sri Lanka has unsettled India, Colombo’s traditional political and economic partner. China’s loans to Sri Lanka, which amount to about $10 billion, have been unreliable, as some projects were not financially viable.

The relationship between the two countries dates back twenty centuries, though formal diplomatic and economic relations between the two countries only began in the 1950s.

Economic Problems

Economic ties are multidimensional and based on deep mutual trust. The countries’ interests and views are similar, and the close identity of views remains a hallmark of their bilateral economic relationship. Among the formal relations between China and Sri Lanka is the 1962 Sino-Lanka Rubber-Rice Pact, which has strengthened ties between the two nations.

Moreover, establishing free trade zones and accelerating the consultation of a free trade agreement would benefit the people of both countries. In particular, the government of Sri Lanka has repeatedly shown its desire to join global supply chains and value chains. Establishing an industrial and logistic zone in Hambantota would further improve the basic industrial structure in Sri Lanka. This could help the country move from a ragtag to a sustainable path toward prosperity.

Rajapaksa’s Authoritarian Policies

The current political situation in Sri Lanka is in a state of crisis, largely because the government is allowing its military to shoot lawbreakers on sight. Food, fuel, and medicine shortages are becoming a major concern. The government is also deep in debt to China, which raises the question of state capture. And the Rajapaksa administration has suppressed protests against fuel shortages of essential goods by using authoritarian measures. The military has seized many civilians, banned social media, and assaulted protesters and journalists, among many other things.

The worst effect of Rajapaksa’s authoritarian policies have been a devastating ban on chemical fertilizers. Farmers’ livelihoods were destroyed.

Authoritarian Polices and its Role

In turn, this led to a spike in food prices. Additionally, the ban on pesticides and chemical fertilizers led to dramatic cuts in domestic food production. These policies caused severe food shortages and inflation. And the ban on the use of plastic bags and other consumer goods also stunted tourism.

The recent election in Sri Lanka gave the Rajapaksa family a landslide victory, and many analysts believe this result was a direct result of the sweeping anti-Tamil terrorism campaign. The election was held in the middle of a coronavirus pandemic, and many people were afraid that the sweeping victory would lead to authoritarian policies. But the Rajapaksas’ authoritarian policies have weakened the country and have left many citizens with no choice but to vote for their candidates.

Public Anger

Public anger has mounted as the government’s economic mismanagement has forced the country to face a growing shortage of basic commodities. Prices for staple foods have skyrocketed, and imported goods have become prohibitively expensive. Middle-class neighborhoods have organized nightly protests, and the president has refused to take responsibility for the situation.

A special All-Party Conference has failed to produce solutions for the crisis. Many call for the president to resign and change course to bring stability to the country. The crisis has exacerbated already-insecure situations and led to the appointment of an interim government led by the opposition.

Government and Public

The government has enlisted the military and police to restore credibility, which has only aggravated public anger. These forces have been able to search and detain people and are now allowed to search private vehicles and property. The president has also called for a new election to elect a new prime minister and cabinet. Regardless of the new government’s intentions, it will likely introduce amendments to the constitution that will end the executive presidency.

Protesters have defied the curfew and emergency decree, calling for the president to resign. Anti-government demonstrators have been attacking government supporters, slinging iron bars, and attempting to stop them from exiting the capital. Police responded by using water cannons and tear gas to disperse protesters. At least 40 vehicles belonging to ruling party supporters have been destroyed. Meanwhile, the government has done little to quell the public anger, as the prime minister presented the protest movement as hostile.

Need for Foreign Currency

With a rapidly deteriorating economy and a shortage of essential medicines, the need for foreign currency in Sri Lanka facing a crisis is critical. The central bank has virtually no foreign currency, leaving the government and its people unable to pay import costs or repay foreign debt. This situation puts the government and new leaders under huge pressure to get the economy back on track. The government is blaming the Covid pandemic for the country’s economic woes, but the reality is that the crisis has hit Sri Lanka’s tourism industry. The deadly church bombings have deterred many tourists from visiting the country.

Overseas remittances, a major foreign currency source, have dropped drastically. The government has ordered the mandatory conversion of foreign currency and exchange rate controls to combat the crisis. Food prices have risen by over five percent, resulting in severe shortages in the country.

Final Words

The shortage has put many importers and manufacturers in a bind. The country has borrowed heavily in the past and is now facing debt repayments of over $15 billion in international sovereign bonds. However, officials are gradually building up their reserves to meet these debts.

Imports and exports have plummeted, and with a lack of foreign currency, it is difficult for the country to meet its domestic and international obligations. A lack of foreign currency also hinders the country’s ability to attract foreign direct investment. Debt defaults devalue the national currency, making it more difficult for the country to borrow foreign currency. This situation has exacerbated the country’s economic crisis, and a new government needs to ensure that the country’s finances remain stable and attract additional external funding.

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