Sri Lanka’s Leaders Face Mounting Pressure As Economic Crises Grows

As the world’s eyes are riveted on Ukraine, an island nation in South Asia is going through a slow motion implosion, Lebanon style. Sri Lanka’s economic fundamentals are off the charts in the wrong direction.

Public debt is at a staggering 119% of GDP, inflation and fiscal deficit is in double digits, and with foreign reserves shrinking at an alarming pace, the Sri Lankan rupee has also gone into free fall, depreciating a steep 26% against the dollar.

In its latest staff assessment, the International Monetary Fund warns that Sri Lanka is experiencing “a combined balance of payments and sovereign debt crisis.” The IMF is being polite.

Into this already combustible mix one should surely add social pressures, as food prices have soared due to a quixotic government decision to ban the imports of chemical fertilizer, and the pandemic itself. How has Sri Lanka ended up in this mess and is there a viable path forward for what had been one of South Asia’s most progressive countries?

The Rajapaksa brothers who run the country—Gotabaya is president, Mahinda is prime minister, and Basil is finance minister with assorted clan members in key positions—attribute the country’s macroeconomic woes to matters outside their control.

The precipitous fall in tourist arrivals they claim, both due to the pandemic and the bloody April 2019 Easter Sunday terror attacks which preceded that, punched a hole in the economy which cannot be easily restored. While tourist arrivals have indeed plunged, blaming it for Sri Lanka’s current travails is a bit like blaming the sinking of the Titanic for the lack of lifeboats on board. The iceberg in the Sri Lankan economy has been the Rajapaksa clan’s mismanagement of the country since they were voted into power in November 2019.

Take the ban on chemical fertilizer, for example, which was introduced in April 2021 as a foolhardy attempt to encourage organic farming. While there is scientific merit in scaling back on the use of chemical fertilizer, any dramatic shift in policy should have been choreographed to farmers and phased in over a period of time.

But Prime Minister Mahinda rammed through the new policy without consulting with the farming community and agriculture production has plummeted as a result. A reversal in policy came too late for the sowing season. Sri Lanka is witnessing widespread food shortages, just at a time when global food prices are soaring due to supply shocks from the pandemic and Russia’s invasion.

Does the government have the resolve and political will to deal with the economic crisis? The IMF warns that Sri Lanka’s “debt overhang and persistent fiscal and BoP [balance-of-payments] financing shortfalls” will constrain growth and jeopardize macroeconomic stability in both the near and medium term. Sri Lanka urgently needs international support via a traditional IMF program (to restore macroeconomic stability) and a medium-term solution for its debt overhang (where China is both the problem and a potential solution).

At the moment, the brothers are extremely reluctant to bite the bullet and do the right thing. The street may well force them to make the hard choices in the next few weeks.