Yves here. As an American, yours truly is not the best judge, but this article aspires to provide a balanced, high-level account of the economic and political breakdown in Sri Lanka.1
By Neil DeVotta, Professor of Politics and International Affairs, Wake Forest University. Originally published at openDemocracy
Sri Lankan President Gotabaya Rajapaksa formally resigned on July 15, 2022, having earlier fled the country amid widespread protests in the Southern Asian nation.
The man who replaced him, Prime Minister and now interim President Ranil Wickremesinghe, is likewise facing calls to go amid political and economic turmoil.
Although the drama escalated over a matter of days – during which the presidential palace and the prime minister’s residence were both occupied by demonstrators – the crisis is years in the making, argues Neil DeVotta, professor of politics and international affairs at Wake Forest University.
The Conversation U.S. asked DeVotta, who grew up in Sri Lanka and specializes in South Asian politics, to explain what brought about the crisis and where the nation of 22 million goes from here.
Can You Talk Us Through the Latest Events?
What happened in Sri Lanka was really quite revolutionary. For the first time in the country’s history, you had a president resign – and in the most humiliating manner.
Gotabaya Rajapaksa had earlier announced his intention to step down but did not do so immediately, because once he did that he would lose his presidential immunity from prosecution. Instead he fled the country, first going to the Maldives and then to Singapore. Some claim he may now be looking to get to Saudi Arabia – all of which is somewhat ironic given that Dubai, the Maldives and Saudi Arabia are Muslim states, and during his tenure in power Rajapaksa stood accused of encouraging Islamophobia to bolster his lock on power.
The catalyst behind all this was a protest movement. Demonstrators have since left the president’s and the prime minister’s official residence, but the protest movement has only partly succeeded. They wanted Rajapaksa and his brothers gone. But many also wanted the ouster of Prime Minister Wickremesinghe.
Instead, Wickremesinghe, who was not elected to Parliament and got a seat only through a national list that tops up the legislature, has now been sworn in as interim president. So a man with no mandate – his party got only a small fraction of the 11.5 millionvalid votes cast in the 2020 election – is now acting president and may end up with the job full time once the Sri Lankan Parliament holds a secret ballot on July 20, 2022.
What Was the Spark to the Crisis?
The spark was really set off in April 2021 when Rajapaksa announced a ban on fertilizer, herbicides and pesticides.
Successive Sri Lankan governments have long been living beyond their means and employing a debt rollover strategy to keep the country afloat – in short, the country was relying on new loans, alongside revenue from tourism and international remittance, to pay down its debt.
But then came COVID-19, which severely affected tourism and contributed to what economists call a “balance of payments crisis.” In other words, the country was unable to pay for essential imports or service its debt. This pushed the government to abruptly announce a ban on herbicides and fertilizers – something they hoped would save the country US$400 million dollars on imports annually. The president had previously indicated that the move to organic agriculture would take place over 10 years. Instead, it was implemented abruptly despite warnings over the impact it would have on agriculture yields.
That led to farmers’ protesting. They were soon joined by sympathetic unions. The balance of payments crisis went far beyond farming. It got to the point when the government couldn’t pay for almost anything it was hoping to import, leading to shortages in medicines and milk powder. And that led to people from other sectors also protesting.
On top of this, the government was printing money to pay for goods. This inevitably led to inflation – which is running above 50%.
The tipping point came when people found that they could no longer pay for cooking gas and fuel. A few weeks ago, the government announced that it would provide fuel for essential services only, shuttering schools and ordering workers to stay at home.
So This Was a Purely Economic Crisis?
Not quite. While the spark was a balance of payments crisis, I believe that underpinning the mess is a deep-rooted ethnonationalism that has allowed and encouraged corruption, nepotism and short-termism.
Since at least the 1950s, Sri Lanka has been in the grips of Sinhalese Buddhist nationalism. The Sinhalese make up around 75% of the population, with Tamils at around 15% and Muslims at 10%.
Sinhalese Sri Lankans have long been favored when it comes to access to universities and government positions. This has been to the detriment of not only the country’s minorities but also its governance. It has led to a decay in how the state functions. Sri Lanka has ended up with a system that disregards merit and is instead rooted in enthnocracy – rule by one dominant group. And that has helped spread nepotism and corruption.
The fact that the Rajapaksa brothers helped brutally suppressed and defeated a three-decade Tamil insurgency bolstered their credentials among Sinhalese Buddhist nationalists and consolidated their grip on power.
That civil war, which ended in 2009, also contributed to the current crisis. Through the conflict, the Sri Lankan government ran national deficits to finance the counterinsurgency.
After the war, the Rajapaksas looked to develop the country by building up its infrastructure. What the country instead got was “blingfrastructure” – vanity projects, often financed by China, that were dogged by corruption and graft. One such project is an airport that sees very few planes land or take off. I visited the Mattala Rajapaksa International Airport in 2015, and the only other people there were a coachload of students from a school on a field trip. Nothing has changed since then.
Other such wasteful projects include a conference center and cricket ground – called the Mahinda Rajapaksa International Cricket Stadium – not far from the Mattala airport that hosts next to nothing. And then there is the Lotus Tower, the tallest communications tower in South Asia, which was supposed to contain other facilities and was ceremonially opened in 2019 but remains out of operation.
The construction of such projects has been dogged by suggestions of corruption. Such projects largely involved Chinese construction firms, often using Chinese laborers – including the reported use of Chinese prisoners, in the case of the Hambantota Port, now leased to China for 99 years because Sri Lanka could not pay its debts. Sri Lankans themselves have benefited only little.
On paper it looked like the country was developing and GDP was rising. But the growth was from external money rather than goods and services generated in Sri Lanka.
Chinese loans with short terms and high interest played no small role in quickening Sri Lanka’s debt problem. As a result, the country currently owes between $5 billion and $10 billion to China, and its overall debt stands at $51 billion dollars.
What Happen Next?
The most important thing that Sri Lanka needs going forward is political stability. Without that, you will not get the help required from the international community.
And Sri Lanka is not going to get out of its economic mess without help from international actors, such as the International Monetary Fund, the Asian Development Bank and the World Bank. It also needs help from partners like India, Japan, China and the U.S.
As it is, Wickremesinghe, the interim president, has said the country will suffer shortages in goods until the end of 2023.
Sri Lanka needs large-scale, long-term economic restructuring. And for that to happen, the government will have to restructure its bilateral debt – the IMF will not give Sri Lanka money simply so that it can pay off its debt to China or any other entity.
But China knows that cutting any debt deal with Sri Lanka will mean that other countries that hold large Chinese debt – like Pakistan and some African countries – will expect the same. And Beijing doesn’t want to set that precedent. On the other hand, China will most likely have to work with Sri Lanka and other bilateral donors, especially now that the Rajapaksas are out of power. It needs to cultivate goodwill to maintain influence in the island and will not want to be seen as exacerbating Sri Lanka’s woes.
The IMF will also likely expect painful measures to tamp down costs if it is to come to Sri Lanka’s aid. It will most likely insist that Sri Lanka free float its currency rather than peg it to the dollar, since right now Sri Lankans abroad are using unofficial channels – and not the banking system – to remit foreign currency. So it will likely have to devalue its currency beyond what it already has. The IMF will also likely expect that the government cut back on the number of state employees – which currently stands at around 1.5 million people.
This will be a very painful process, and it will take some time. And it will likely worsen the country’s turmoil in the days ahead.
1 With the exception of the use of the sloppy and misleading term “money printing.” There are more precise and informative ways to describe economic mismanagement, plus that expression takes the focus away from the importance of falls in real economy productive capacity (particularly shortages) in creating inflation.
Thanks for this overview, it seems as balanced as anything I’ve read. It certainly addresses the meme beloved of certain western media types that its all down to organic farming.
For countries like Sri Lanka, it shows the absolute importance of minimizing debt denominated in foreign currencies. It can’t be entirely avoided – all countries that successfully developed at some stage used foreign debt – but it has to be ruthlessly focused on investments that raise productivity, and nothing else. This is hard enough to do in well functioning countries, nearly impossible in countries with very weak institutional structures and rampant corruption.
China is in a bind on Sri Lanka. For a decade or more, pouring loans and investments into developing countries seemed like a win-win. Unfortunately, they are now learning the lesson that its easy to invest and lend, not so easy to get your money back when things go wrong. Chinese bankers are often much less experienced in foreign lending and have been taken for a ride all too often, especially in south America. The big problem for China is timing – its not a good look domestically to be seen to be too generous to a foreign country when there are street protests going on by depositors who can’t get their money back from their local regional bank. Plus, they can’t afford to be seen as a soft touch in comparison to other lenders. So the Sri Lankans may find that while they may have hoped to play Chinese and western creditors off each other, they may find the opposite – both want to play hardball.
Given the absence of evidence that Sri Lanka can independently get its act together, the only hope for it is that collectively its creditors home countries realize that its in nobodies interest for the country to collapse economically, not least because if it does, then much bigger countries like Pakistan are waiting in line. Its in both China’s and the wests interest to deal with the debt and foreign exchange problems in an equitable way. Not that this has proven an obstacle in the past to short term and stupidly punishing policies towards debtor nations.
“Debts that can’t be paid, won’t be paid.”
Chinese financed and Chinese built infrastructure is a fairly closed loop. China already familiar with excess non-productive infrastructure just sitting around crumbling. Chinese people do indeed look down on the feckless impotence of the developing world and after having raged against western imperialism for centuries understand its clever traps. It would be wrong to call it debt diplomacy because China doesn’t demanded economic reforms or poison pills of liberalization and privatization.
What China did was quite shrewd. A cash injection into Sri Lanka and the money would’ve evoporated into Swiss bank accounts, i.e. a lot of transactions without nothing literally concrete to show for it. Every infrastructure project built a potential vehicle for Chinese expansion and to a lesser extent a way to bleed off excess capacity from the mainland.
China is no good friend to the developing world, but better than the West. The developing world might benefit from a Cold War 2.0 and enjoy the largess two superpowers trying to woo them to their side.
That said, the Russian sanctions set off the dominoes. Who is the bull in the China shop? America is like a cop standing outside a classroom with the Russians inside. Settle your business directly and without hesitation or else more innocents suffer.
The nation seems to have ‘benefitted’ from a culture of corruption. All that money wasted on ‘vanity’ projects. [All the “right” pockets lined with silver, etc.]
Now the spectres of the World Bank and the IMF are raised.
How much worse can it get in the short run if the country flat repudiates the “vanity project” debts?
The public has experienced their power to “influence” the government. Throw in some big time austerity and watch the next chapter in the history of the nation unfold; “The storming of the Summer Palace, Part Two.”
I did notice that the army stayed out of this. Was this from internal weakness or policy on the part of the higher officer corps? As Burma is showing right now, South Asia has a robust history of military coups and administrations. Anybody know much about the Ceylon military?
Thanks for highlighting the seemingly first nation to succumb to the Jackpot Express.
Please note that the interim President Ranil Wickremesinghe was formally elected President this morning.
Ranil Wickremesinghe wrote a fantastic and illuminating piece for the WEF back in 2018 when he was Prime Minister:
Sri Lanka PM: This is how I will make my country rich by 2025
Worth a read (especially between the lines).
See also from the World Bank:
Vision 2025: Sri Lanka’s Path to Prosperity
Methinks Mr Devotta writes for an audience who want their anti-Chinese prejudices confirmed yet again.
Real debt trap: Sri Lanka owes vast majority to West, not China
…”Sri Lanka has a history of struggling with Western debt burdens, having gone through 16 “economic stabilization programs” with the Washington-dominated International Monetary Fund (IMF).
These structural adjustment programs clearly have not worked, given Sri Lanka’s economy has been managed by the IMF for many of the decades since it achieved independence from British colonialism in 1948.
As of 2021, a staggering 81% of Sri Lanka’s foreign debt was owned by U.S. and European financial institutions, as well as Western allies Japan and India.
This pales in comparison to the mere 10% owed to Beijing.”
Thank you. You ansered my question
The Sri Lankan focus on the Chinese side of their debt is mostly because it seems that the Chinese loans are shorter term and may be on on higher interest rates, at least according to Chinese financial media. The structure of the loans are also very different – initial Chinese lending was tied to individual projects, so the project itself is the collateral. Most of this collateral is now pretty much worthless.
But more recent Sri Lankan borrowings from China seem to have been in the form of syndicated loans, as opposed to bond issuances, and mostly used to pay off existing debts rather than invest. Or put another way, its a direct borrowing in cash from a bank, rather than using tradable instruments. This creates significant problems for both parties when it comes to trying to come to an agreement over them, not least because the Chinese debtors will be looking to Beijing to bale them out, while Beijing will be very reluctant to set that precedent. So…. its far more complicated than the raw figures in that article imply. From the point of view of the Sri Lankans, they know what to expect from the IMF and the ADB and so on. They don’t know what to expect from the Chinese.
Sorry, I posted this just before I saw Yves response below – she puts it much more clearly than I could.
Short answer is – yes many western observers are trying to pin the blame on China. But this does not mean that China is the good guy here. They have been particularly aggressive with their loans to Sri Lanka and at least initially, have been very unhelpful with trying to solve the problem.
I have noticed a concerted misinformation campaign about the bulk of the Sri Lankan debt — virtually all media emphasizes the Chinese despite their relatively small share.
Minitru is hard at work …
I am not well qualified to comment on Sri Lanka either. So this is a question that hopefully someone can answer.
Clearly, the causes and resolution path for the debt crisis is important. I have seen various other sources claim that Chinese debt is only 10 per cent of the total which is broadly consistent with the data quoted here. .
But much commentary (not just this article) seems to focus on the role of China, even though most of the debt is not owed to China.
Would be good to understand whether Chinese debt really is the major and decisive financial issue that commentary sometimes suggests. Does it have particular issues that other debt does not, independent of value? The article implies that but does not then elaborate beyond a general comment about term and interest rates, as well as questioning the utility of specific projects.
Clearly, focusing the financial debate on the role of China has geo political relevance too.
Hi Yves, as a Sri Lankan this is a bad article. It’s basically propaganda. It completes ignores our colonial history, the fact that it’s a western debt trap (81% of our debt to them or allies) and does the propaganda shit of blaming China. It doesn’t talk about lack of industrialization, why we didn’t industrialize (neoliberal since the 1980s) and how America and India are picking our bones even cleaners now.
Here are some recommendations:
Without a breakdown of terms and maturities, it’s not clear your assertions are correct. The loans made in the early 2000s by the World Bank and Japan were on concessionary terms, with very long maturities and 1% interest rates. The more recent loans from China have much shorter maturities, much higher rates, and China has been claimed to be aggressive about enforcing terms:
Moreover, the Chinese debt is more recent and can be argued to be the straw that broke the camel’s back.
I am not saying the West is not at fault too but I am leery of efforts to exculpate China when it was requiring an already heavily indebted Sri Lanka to borrow rather than structuring investments with contingent payments or other equity-like terms.
Sri Lankan economist Umesh Moramudali used Right To Information to do a detailed breakdown here. Chinese loans have much lower rates than the bank loans were getting (the ISBs), those were basically credit cards.
The straw that broke the camel’s back was the high interest ISBs, which basically can’t be restructured without technically being a default. This is widely acknowledged, just look at how commercial borrowings exploded after the war.
China does restructure liberally. We actually used refinancing from the Hambantota Port to pay off ISBs.
Or Deborah Brautigam and Meg Rithmire cover it in the Atlantic. As their research states:
The problem is that Sri Lanka used the Chinese loans to build dumb, non-productive assets, but that debt had nothing to do with the current crisis. It was the ISBs to BlackRock and the usually vulture capitalists. We’re getting sued by Hamilton Reserve Bank Ltd. China didn’t even say anything when we stopped paying them also. They’ve just been sending us rice. They’re simply not the problem.
Thank you for providing the article at the detailed breakdown link. It was very informative and much appreciated.
In case you missed it, see also this NC post from April:
Sri Lanka Economic Crisis Inflicted by Self-Serving Elite
It supports many of Indrajit Samarajiva’s points.
Sri Lanka has just defaulted on its foreign debt for the very first time. Attributing its current predicament to a Chinese ‘debt-trap’ is a new Cold War propaganda distraction – which we will undoubtedly hear much more of.
In this fable, Sri Lanka is a country caught in a debt trap due to white elephant projects mooted and financed by borrowings from China. Blaming Sri Lanka’s debt crisis on Chinese loans is not only factually wrong, but also prevents understanding the origins and nature of its current crisis.
Outstanding Sri Lanka government foreign debt in April 2021 was US$35.1bn. Policy errors have reduced foreign direct investment (FDI), exports and government revenue, changing the composition of its foreign debt for the worst.
Debt to the Asian Development Bank (ADB), World Bank, China, Japan and other bilateral lenders, including India, came to about a tenth each. Borrowing from capital markets – 47%, or almost half – is mainly responsible for its debt unsustainability.
After all, borrowing from multilateral development banks – mainly the World Bank and ADB – and bilateral lenders are mostly on concessional terms, while debt from commercial sources incurs higher interest rates.
Commercial loans tend to be more short term, and subject to stricter conditions. As sovereign bonds or commercial loans become due, their full value must be repaid. External debt servicing costs surge accordingly.
As of April 2021, about 60% of Sri Lanka’s debt was for durations of less than ten years. The US dollar denominated debt share rose sharply – from 36% in 2012 to 65% in 2019, as Chinese renminbi denominated loans remained around 2%.
Adding government guaranteed debt to state-owned enterprises, total borrowings from China were 17.2% of Sri Lanka’s total public foreign debt liabilities in 2019. Meanwhile, commercial borrowings grew rapidly from merely 2.5% of foreign debt in 2004 to 56.8% in 2019.
The effective interest rate on commercial loans in January 2022 was 6.6% – more than double that for Chinese debt. Unsurprisingly, Sri Lanka’s interest payments alone came to 95.4% of its declining government revenue in 2021!
As a Sri Lankan Resident Visa holder (US passport), you are damn straight! (“quite correct” in recieved English).
yep, the author completely ignores the ravages of free trade. the de-industrialization leading to imports substitutes and cash crops for export that took the place of home grown consumables. they became impossible to pay for.
we see this pattern all over the world now.
I don’t think China is the main culprit here. Ian Welsh has a good blog post about this; https://www.ianwelsh.net/the-debt-trap-that-helped-take-down-sri-lanka-was-not-chinese/
Welsh was spot on. thanks for the link.
Ian Welsh is excellent, but as he acknowledges in the article, he knows little about Sri Lanka.
The country has been an exporter of high value foods for centuries (spices, tea) and is not a significant net importer of food (at least not until the catastrophic crop failure this year). Its main export is textiles, and its main imports are petroleum products. It is part of the South Asian Free Trade Area, but apart from the WTO, none of the other major trading blocks, so it has maintained reasonable control over its external relations.
Its nice to blame others for a countries problems, but ultimately its civil war and then subsequent mismanagement has done the most damage. As always when countries take on too much foreign debt, there is a lot of fault on all sides.
if you look at every one of these countries that are failing, all one needs to look at is free trade, THE IMF, and other quack economics which are at the bottom of all of this.
“Imports were not to be controlled,
A High interest rate was imposed. This meant that entrepreneurs in the country had to obtain loans at high interest rates. In Sri Lanka, when this Neo Liberal- Free Trade Model was enforced, the bank loan rate was raised to 25%. The local entrepreneurs could not compete with the imports that came in without paying tariffs or paying low tariffs. The result was that local entrepreneurs gave up their businesses. Instead they found easy money by depositing the money in Fixed Deposits. Imports took the place of local production and this increased the debt of the country. This was advantageous to the Developed Countries because they found buyers for their manufactures.”
“Milton Friedman of the Chicago School of Economics, the author of the Free Trade- Liberalization Neoliberal Model of the IMF died recently having taken all Third World countries and even some European countries to their graves.
All these countries have followed the Neo Liberal –Free Trade Model. This Model also brought riches in billions from the Third World to the Developed Countries.”
and really, sri lanka was forced into trying something, they simply ran out of money to pay for imports, which in the past they were self sufficient in. now look at the mess the free traders have made again. none of this can be turned around over night. sri lankas people are becoming radicalized, so instead of trail and error, violence will erupt because the system of free trade has robbed them of their future.
The most correct answer as to why there are 4 day queues for gasoline (petrol), diesel, and cooking gas is the lack of GD! US dollars! Not “foreign currency “, US dollars. And no, the China debt is not repayable in US dollars.
Blaming the crisis on the ban of fertiliser is like blaming $6 gallon gasoline on Putin. The buck stops in Washington.
they simply could no longer afford to service a debt that grew ever larger under free trade.
what can’t be paid back, won’t get paid back. imports are not a asset, they are a debt.
selling cash crops to service the debt under free trade became impossible, instead of raising food for your own, cash crops were sent offshore to try to service that debt. and Sri Lanka had to buy what they used to grow, the debts just kept ballooning till they became un-payable.
Tourists bring money in and folks working overseas send money home. Then Covid killed both and, as usual, the local politicos kept the music going.
The first of many, I’m afraid.
a lack of tourism only exacerbated a already monster debt from free trade that could not be paid back.
a lack of tourism sped the mess up a bit.
“……..the Mattala Rajapaksa International Airport”
“….. the Mahinda Rajapaksa International Cricket Stadium ”
It seems to be invariably the case that where sitting politicians name infrastructure projects after themselves or their family, corruption is not far away. There are other examples. Perhaps sitting politicians who want to be recognised in this way are more interested in their own “status” than in the people they serve.