Torrid times

Sri Lanka — the most important geo-strategic island nation in the Indian Ocean — is in a deep economic and political crisis. The country is grappling with what is said to be its worst economic crisis since its independence. It is partly caused by a lack of foreign currency, which is used to pay for fuel and food imports. The citizens have come out onto the streets. The mass agitation prompted the government to impose an emergency, which gave security forces sweeping powers to arrest people. The entire cabinet, apart from President Gotabaya Rajapaksa and his brother Mahinda, the Prime Minister, resigned. The social media ban has failed to quell anti-government protests. Sri Lanka's Central Bank Governor Ajith Nivard Cabraal, who had resisted calls for an IMF bailout, has also resigned on Monday amid escalating protests in the island nation over the mounting economic crisis, reported NDTV.

Though the nation has seen the worst ethnic cleansing and religious violence during the last four decades, Sri Lanka was considered, till 2019, as a classic case study of development economics for its steady improvements in various socio-economic parameters which are considered very important for human development. For example, Sri Lanka's Human Development Index (HDI) value for 2019 was 0.782 — which has put the country in the high human development category, positioning it at 72 out of 189 countries and territories. Between 1990 and 2019, Sri Lanka's life expectancy at birth increased by 7.5 years, mean years of schooling increased by 2.3 years and expected years of schooling increased by 2.8 years. Also, Sri Lanka's GNI per capita has increased by about 229.4 per cent. Against this strong socio-economic background, the present economic crisis baffles any serious student of political economy.

In this article we shall try to explore two basic questions: (i) what are the possible causes, in addition to the Covid pandemic, of this sudden economic crisis? (ii) Who will bail out this geostrategic island nation?

Possible causes

The most widely discussed cause of this crisis is the mounting debt obligation of Sri Lanka and the shortage of foreign exchange to import its essential supplies. By the end of March 2022, Sri Lanka has foreign-currency reserves of around USD two billion, while the total debt repayment target in the year 2022 is USD seven billion. Of this, USD 1 billion worth of bonds are maturing as early as July 2022. External debt in Sri Lanka has been on a steep rise since 2005. From USD 11.3 billion in 2005, it rose to USD 21.7 billion in 2010, USD 43.9 billion in 2015, and USD 56.3 billion in 2020 during the pandemic. Though huge debt with China is often cited as the main reason for the current predicament, the actual data on Chinese debt does not substantiate that claim.

The rising debt to GDP ratio is another talked about issue. The World Bank data suggests that this small island, historically, had a very high debt to GDP ratio. For the last three decades, Sri Lanka maintained an average debt to GDP ratio of over 70 per cent. In 1990, the debt to GDP ratio was 96.58 per cent, which rose to 105.53 per cent in 2002, and in 2015 it declined to 77.65 per cent. Again, the debt to GDP ratio rose to 101 per cent in 2020 and by September 2021 it reached around 107 per cent. It is apprehended that as the economy has shrunk due to prolonged Covid lockdown, the debt to GDP ratio has risen further.

Higher debt to GDP ratio during a pandemic is not surprising. Failure of the government and Central bank to manage the economy has only triggered the crisis. Secondly, with only a 10 per cent share of Sri Lanka's external debt, China or Japan cannot be made responsible for the crisis. Instead, the Sri Lankan government should have decided to defer its obligation on sovereign bonds, sold to foreign borrowers, and use that fund to import essential commodities like food and medicine to avert this crisis.

The most important cause of this crisis is poor governance at the time of emergency. The complete failure of the Sri Lankan government to ensure food supply to its citizens by implementing a proper agricultural policy is an example of colossal incompetence. Sri Lanka had attained self-sufficiency in rice production in the early 1980s. Subsequently, it has emerged as the largest exporter of tea by converting small landholdings into micro and small tea gardens. Though it has helped the nation to earn more foreign currency by exporting tea, the country's dependence on imported food grains increased over the years. This got aggravated by a faulty decision by the government to ban the use of chemical fertilisers and pesticides in agriculture without making any alternative planning. President Gotabaya Rajapaksa cited health concerns when his government banned the import of chemical fertilisers in April 2021. This announcement of Rajapaksa, who is very unpopular among the human rights organisations of the West due to his role in suppressing ethnic Tamil minorities, might have earned a few 'brownie' points for him but this decision has ruined Sri Lanka's tea and food grain production.

Analysts believe that the root of the present problem lies much deeper — the resurgence of religiously inspired Sinhala Buddhist neo-nationalism which has created nationwide social unrest. According to Subedi (2021): since Sri Lanka became independent in 1948, there have been systematic efforts to homogenise the national identity based on religion and ethnicity, with Sinhala Buddhism being a focal point. Coupled with a declining economy, growing unemployment, and poor political inclusion, the Sinhala Buddhist nationalism was the key driver of political conflicts and social unrest in the past, which resulted in a civil war between minority Tamils (led by the LTTE) and the majority Sinhala Buddhists between 1983 and 2009. The peace process that started following the defeat of the LTTE in 2009 has, however, witnessed a dramatic resurgence of Sinhala nationalism inspired by what is called "Buddhist extremism". In another study, Gunasingham (March 2019) examined the rise of radical Buddhism against the backdrop of the ongoing Rohingya crisis in Myanmar and sporadic violence involving Buddhist extremist groups and Muslim minority communities in Sri Lanka. Radical Buddhist groups, such as the Bodu Bolu Sena (BBS) in Sri Lanka and Ma Ba Tha in Myanmar, justify intolerance, discrimination, and violence against minority Muslim populations by using Theravada Buddhism, which is widely practised in South and Southeast Asia. Gunasigham apprehended, "If left unchecked, political violence will proliferate in Sri Lanka and Myanmar and could further spill over into nearby regions.". The Easter bombing on April 29, 2019, where nearly 270 people were killed in Sri Lanka, is a worst-case of religious violence which has crippled its tourism industry leading to large-scale unemployment and loss of earnings in foreign exchange.

It may be recalled that in 2005 when Mahinda Rajapaksa, son of Don Alwin Rajapaksa who was a two-time parliamentarian and the founding member of the Sri Lanka Freedom Party (SFLP), became the President of the island nation, his determined bid for a military defeat of the LTTE was commanded by his brother and the then defence secretary, Gotabaya Rajapaksa — the present President of the country. Led by two brothers, Sri Lanka embarked on the militarisation of the Sinhalese-Buddhist majority. As per a report by the Indian Express, after the 2009 victory over LTTE, in which thousands of Tamil civilians were killed or went missing, there was no looking back for the Rajapaksas.

Many political thinkers claim that Sri Lanka is not a democratic state. Actually, it is being governed by a group of political oligarchs. Their power flows through their relationships with each other. Their wealth and connections allow them to influence public policy behind the scenes. Janice Jiggins (1979) in her book, 'Caste and Families in the Politics of the Sinhalese, 1947-76', argued that the results of the general elections in August 1977 had heralded the beginning of a 'new era' because the Constitutional amendment after the election marked the abandonment of the Westminster-style parliamentary politics for something more akin to the presidential system practised in France and the United States. According to Jiggins, this new system of governance was an admission that parliamentary democracy can no longer mask the oligarchic nature of the Ceylonese polity in which power was monopolised by a handful of families closely bound by ties of caste, marriage, and economic interest. Whichever political party came to office, the power remained with the oligarchy of Goigama families whose function was to perpetuate the hegemony of the comprador native bourgeoisie and their Western patrons as a whole.

Gupta (2018) has argued that oligarchy has worked in Sri Lanka for the last 70 years because its leaders have institutionalised their power through law, media, and political rituals. In his column, in the Colombo Telegraph (November 9, 2018), Gupta wrote: "The oligarchy led by Mahinda Rajapaksa defeated the other oligarchy led by Ranil Wickremesinghe. Mahinda occupied the Prime Minister's office and Ranil retreated to the Prime Minister's residence (Araliyagaha Mandiraya). The theatrics of both oligarchy groups is not over yet. Commenting on the clash of oligarch families, the then Sri Lanka President Maithripala Sirisena, said that the national policies were formulated and implemented by a group identified as "Butterfly Club" under Ranil Oligarchy. As an immediate response to this, Mangala Samaraweera has identified the inner coterie of Mahinda Oligarchy as the 'Leeches Club'". Thus the present crisis can be traced back to the clash between two powerful oligarchs of Sri Lanka. Now Ranil Wickremesinghe is leading the protest, with the clarion call for an 'Arab Spring'-type uprising against Rajapaksas.

It is reported that in South Asia, no other political dynasty has been as confidently nepotistic as Rajapaksas. During Mahinda Rajapaksa's second term (2010-15), there were more than 40 Rajapaksa family members in government posts, apart from the cabinet. Many of them faced inquiries for financial fraud after Mahinda's government was voted out. Basil, who is also a US citizen, was arrested, and his wife and eldest daughter were questioned.

Mahinda began his comeback with local elections in 2018. President Mathripala Sirisena, fearful of Mahinda's return, sacked Prime Minister Ranil Wickremesinghe and appointed his old boss Mahinda as PM. The new arrangement did not last. Mahinda formed a caretaker government. Gotabaya won the 2019 presidential election hands down. Mahinda won the parliamentary election in mid-2020 with a two-thirds majority. In the present government of Gotabaya and Mahinda, the Rajapaksa clan has taken charge of 11 ministries. Other family members have been accommodated in the PM and President's secretariat. At least one holds a diplomatic post as consul general in Los Angeles, reported The Indian Express.

Nepotism, corruption, neo-nationalism of Sinhalese Buddhists, and inefficiency of the rulers have led Sri Lanka to this serious crisis.

Who will bail Sri Lanka out?

The former Prime Minister Ranil Wickremesinghe has proposed that an 'aid Sri Lanka consortium' — consisting of India, China, Japan, South Korea, the European Union, and others willing to assist — be formed to address the country's immediate economic needs. He also said that both the World Bank and the Asian Development Bank (ADB) have agreed to assist the country with short-term loans to buy urgent requirements such as medicine. According to him, the International Monetary Fund (IMF) is also willing to assist the country.

Sri Lanka needs huge financial assistance from the donor countries to come out of this crisis. Past experiences with the IMF have not been pleasant. Central Bank Governor Ajith Nivard Cabraal, who had resisted calls for an IMF bailout, has resigned. As of December 2021, the only European country which featured in the top 10 countries with the highest foreign exchange reserve was Switzerland with USD 1.03 trillion. Eight of the listed countries were from Asia. The other country was Russia with USD 0.46 trillion. China topped the list with USD 3.2 trillion, followed by Japan with a forex reserve of USD 1.25 trillion. India and South Korea had USD 0.56 trillion and USD 0.43 trillion respectively.

China and Japan are in a much more comfortable situation compared to others. India could have used the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) platform, which was initiated in 1997, to take the lead in assisting another member nation. The 5th summit of the BIMSTEC ended on March 30, 2022, in Colombo, without making any specific commitment to bail out Sri Lanka from this crisis. Though Japan also enjoys a long cultural, religious and economic tie with Sri Lanka, China may be more than willing to assist the island state which holds an important strategic location in China's Maritime Silk Route. The example of the Chinese strategic bailout of Greece, during its crisis when even the EU showed them cold shoulders, is a case in point.

China is one of the major trade partners of Sri Lanka and it has already made huge investments in strategic assets. The Ceylon-China Trade Agreement of 1952 was undoubtedly the most useful trade agreement negotiated by Sri Lanka which was in operation for 30 years. Like 2022, 1952 was also a very bad year for Sri Lanka when the country had to face a severe shortage of rice, as rice was not available from the traditional suppliers – Burma, Thailand, and Indo-China; and the world market price of rice had risen by 38 per cent between 1951 and 1952. The drastic reduction of commodity purchases by the West, in particular, of natural rubber by the United States, led to a collapse of Sri Lanka's export prices by 23 per cent between 1951 and 1952.

At that time China was unable to obtain rubber as a result of the prohibition of rubber exports from Malaya following a UN resolution preventing the sale of rubber to China. Thus, China wanted rubber as badly as Sri Lanka wanted rice. Leaders were quick to realise the mutual benefits of trade with China and negotiated the Ceylon-China Trade Agreement or the Rubber-Rice Pact in Beijing towards the end of 1952.

The Rubber-Rice Pact was a win-win for both partners. During the last seven decades, the situation has changed completely. China is now an emerging superpower and Sri Lanka is a crisis-ridden island nation that falls on its marine route.

Conclusion

It cannot be ruled out that due to Sri Lanka's geostrategic importance in the Indian Ocean, global powers might have engineered and aggravated the crisis with the help of local political oligarchs to take control of the island politics. In this fight among big nations for their calculated advantage, the citizens of Sri Lanka are the worst sufferers. If the crisis aggravates further, it will spread to India — the nearest neighbour of the island state. India, which is already in the grip of stagflation, may also face a serious food crisis due to the unchecked export of food grains. Moreover, the resurgence of religiously inspired neo-nationalism is creating nationwide social unrest in India. The political leaders should learn from Sri Lanka's experience.

Views expressed are personal