Sri Lanka’s Crisis of Governance: Bad Policy, Irresponsible Spending

Sri Lanka is bankrupt. Beset by widespread street protests, deeply unpopular President Gotabaya Rajapaksa has refused to step down, his adamance preventing economic restructuring and constitutional reform. By all accounts, he has failed as the country’s leader. Yet Rajapaksa had come to power in 2019 with 52 percent of the vote. Parliamentary elections in August 2020 resulted in his party, Sri Lanka Podujana Peramuna (SLPP), winning a steamrolling near-two-thirds majority that allowed it to amend the constitution to give the executive president untrammeled power.

On the hustings, Rajapaksa had promised many things. His "Vistas of Prosperity and Splendor” manifesto pledged free fertilizer for farmers. That never materialized. Instead, he masked the impending foreign-exchange crisis by pushing to produce everything locally. The public was told that the import ban on a wide range of products was to build up dollar reserves.

Among the banned items was chemical fertilizer, the president decreeing that the agriculture sector switch to organic farming overnight. Small-scale farmers and large-scale plantations were equally affected. In the 2022 harvest of rice, a stable crop in which the country had been self0sufficient, this resulted in a 40 percent drop in yields. Tea, a main agricultural export (Russia and Iran are the main buyers) and a principal source of foreign exchange, also took a hit.

Rajapaksa also introduced deep tax cuts, another election promise, but these only benefitted the rich. He slashed income taxes and did away with the Pay As You Earn (PAYE) system, which required private-sector workers to pay taxes directly to the state from their monthly pay checks. In addition, the administration limited the collection of value added taxes (VAT) on goods and services, another principal source of government income. Mangala Samaraweera, finance minister from 2017 to 2019 who died in August last year, warned that the tax cuts would bankrupt the country within a year or two. He was right.

The country was already burdened with foreign debt, desperately trying to raise money through international capital markets to service its borrowing and pay for necessary imports. This led to international credit agencies such as Fitch, Moody’s and S&P Global lowering Sri Lanka’s sovereign rating. Its bonds were downgraded to junk status. The Central Bank resorted to printing money. The government ran out of funds to pay public servants, a cadre of over a million people, most recruited over the years by successive governments to fatten voter rolls.

In April, Sri Lanka defaulted on most of its international debt of close to US$51 billion. This disastrous financial situation has compelled Colombo to seek assistance from India, Bangladesh and China. It has been in talks about a rescue package with the International Monetary Fund (IMF). Within a span of three months, the rupee plunged in value from an artificially propped-up 240 to the dollar to over 360.

The shortage of foreign currency has meant government is unable to pay for the basics. For months, irrespective of income status, citizens have stood in queues for hours, sometimes days, to purchase cooking gas and fuel. At least seven people waiting in lines have died. The price of rice, milk and other essentials have sky rocketed and are expected to increase further in the coming months. Medicines are scarce, and government-run hospitals across the country have begun appealing for help.

During his time in office, the elder Rajapaksa went on a borrowing spree mainly for vanity infrastructure projects funded by the Export-Import Bank of China and most built in or in the vicinity of his hometown of Hambantota in southern Sri Lanka. These include an international airport at Mattala, a huge cricket stadium, an international convention center, a port facility and a hospital which was recently the subject of an investigative documentary by the Australian Broadcasting Corporation. All are white elephants that generate no income but have the government scrambling to pay off loans obtained to build them.

The ports, shipping and aviation minister Nimal Siripala de Silva recently stated that Mattala Rajapaksa International Airport, which hardly has any air traffic, is losing 100 million rupees (US$275,000) a month. This is in addition to the cost of servicing the related US$ 210 million loan that the country must pay Chinese banks. According to reports, nearly 2000 acres of forested land had been cleared to build the airport, displacing wildlife including elephants.

Since it was built, the cricket stadium has hardly hosted any international tournament which usually brings in good revenue. The harbor has barely any traffic and the convention center has hosted few conferences. In Colombo, the government borrowed US$514 million to build a tower, which is topped with a lotus bud, the symbol of the Rajapaksa-dominated SLPP.

The fuel, food and medicine shortages have galvanized the citizens into action, with even the normally apolitical and people of all income levels demanding that Gotabaya Rajapaksa step down. While decisions and actions of previous governments have contributed to the current catastrophe, people have placed most of the blame for the country going bankrupt on the mismanagement over the past two years under Gotabaya Rajapaksa.

Farmers were first to launch protests, burning effigies of the president and government ministers. They understood that their livelihoods were under threat without the fertilizers needed to grow their crops and bolster yields. The dissent gathered momentum, with small groups protesting at street corners and ultimately congregating outside the presidential secretariat on seaside Galle Face Green in Colombo in late March.

Angry members of the public have defied emergency orders and a curfew imposed by the government to deter them. Those unable to reach site of the demonstrations stood outside their homes or at street corners calling on the Rajapaksa family to step down – “Gota Go Home” has been the constant cry from occupants of the “GotaGo gama” or village erected mostly by young people opposite the president’s office.

The protests have the blessing and backing of civil society groups and several members of the clergy. While the main opposition political parties have given their tacit support, they have so far refrained from participating in any organized protests or events.

This has turned into Sri Lanka’s equivalent of the popular protests that have erupted across Asia including in Hong Kong, Thailand and Myanmar, with Galle Face comparable to the Democracy Monument in Bangkok. Similar encampments have sprung up in provincial capitals around the island and Gotabaya Rajapaksa has been forced to hole up in the presidential palace, about a kilometer from his office.

The protestors want the Rajapaksa family to leave office and to be investigated for alleged bribery and corruption. They are also pushing for “system change”, an end to the untold privileges enjoyed by the financially and politically powerful and the corrupt system that political patronage has fostered.

His authority challenged, President Rajapaksa has admitted making mistakes – the decision to enforce organic farming was one of them, he said. Hoping to appease the public, he had elder brother Mahinda step down as Prime Minister. Yet, Gotabaya, 73, stubbornly clings to office, claiming he wants to serve his full five-year term. “I can’t go as a failed President,” he declared in an interview with Bloomberg on June 6.

After his brother stepped down as prime minister, Gotabaya Rajapaksa introduced some cosmetic changes. Ignoring calls from political parties, civil society groups and the Bar Association of Sri Lanka to form an all-party interim government that could work on stabilizing the country, he installed Ranil Wickremesinghe, a veteran politician, as prime minister. Wickremesinghe, also 73, has served as PM several times before, stretching back to 1993. The Gotabaya Rajapaksa administration, which had alienated several countries by ill-informed decisions to spurn funding for projects such as a light railway from Japan, hope Wickremesinghe can repair the damage and help raise the millions of dollars needed to restore the economy.

Wickremesinghe has said the government is in talks with the IMF for a US$60 billion bailout. The negotiations will take time – and he has warned citizens of dark days ahead, calling on all to tighten their belts. He has appealed to several other international aid agencies and other nations for assistance. The government of India stepped in with a credit line for fuel, food and medicines while other countries including Bangladesh have shipped food. India has also waived payments for earlier shipments of fuel.

Sri Lanka’s main opposition party, the Samagi Jana Balavegaya (SJB), refused to form a government when Mahinda Rajapaksa resigned as prime minister. The SJB has taken the stand that it would form a government only when Gotabaya Rajapaksa heeds the call of the people and steps down or provides a timeline for his departure. All the opposition parties are backing a constitutional reform package which will restore power to parliament and strip the presidency of its executive powers. Yet the isolated president stubbornly clings on, and the political impasse is worsening the economic crisis.