Home » Sri Lanka’s 2022 crisis will hurt for years to come

Sri Lanka’s 2022 crisis will hurt for years to come

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Economically, 2022 will rank as Sri Lanka’s worst year ever.  The immediate reason for the year’s economic carnage was a balance of payments crisis.

It was exacerbated by high debt, the Covid-19 pandemic, the Russia-Ukraine War, global central banks hiking interest rates and dumb policy decisions made by the Gotabaya Rajapaksa administration.

The crisis prevented Sri Lanka from purchasing essential goods – especially cooking gas, gasoline, fertilizer and medicine. The year 2022 will be associated with the days-long queues people grappled with to procure essential items and seeing and hearing of people dying while standing in those same lines.

It was also the year of the political aragalaya (struggle) that dethroned the Rajapaksa family. The aragalaya was tamed, but not before it forced former prime minister Mahinda Rajapaksa to flee his official residence in May and his brother, former president Gotabaya Rajapaksa, to flee the presidential palace in July 2022.

The aragalaya powerfully expressed the spirit of democracy and individual rights. But its demand for “system change” was utopian. Its participants clamored for better governance without interrogating the ethnocracy that undergirded Sri Lanka’s majoritarianism, corruption and impunity.

It is best viewed as a mass agitation against corruption stemming from the scarcity of essentials. But the spirit of the aragalaya and its demands will resonate with the government as it negotiates the writing of a new constitution.

President Ranil Wickremasinghe – who was installed as prime minister when the president and prime minister from the Rajapaksa clan fled – can be credited with taming the aragalaya.

Since becoming president, Wickremasinghe has used the armed forces to crack down on protesters. He has also used the legal system – including the draconian Prevention of Terrorism Act, which has mainly been deployed against Tamils and Muslims — to intimidate protesters and keep their leaders on guard.

An April 2022 protest in Sri Lanka. Photo: East Asia Forum

At the year’s end, the political climate seems stable on the surface. This is because the new regime could purchase and ration the most important imports – thanks partly to not having to make payments on external debts totaling over US$50 billion after it declared sovereign default in April and effectively declared bankruptcy in July 2022.

But the price of goods has skyrocketed. Most Sri Lankans cannot afford to buy what was previously unavailable. The surface calm masks much suffering.

According to the University of Peradeniya, over nine million people now live in poverty. Other reports claim around 70% of people are being forced to eat less than usual, while 20% of students are going to school without food. School dropout rates have increased, as have malnutrition and emaciation.

Sri Lankans are leaving the country in record numbers, women are being trafficked to the Middle East and people are selling kidneys in desperation.

Politically, it seems both that much has changed and that little has changed. Despite being mainly held responsible for destroying the economy, the Rajapaksa family and their Sri Lanka Podujana Peramuna (SLPP) party continue to hold sway.

Wickremasinghe has enabled the Rajapaksas’ return to politics. This is partly because he has just one other parliamentarian from his party. It may also be due to his longstanding friendship with Mahinda Rajapaksa. He is, with good reason, widely denigrated as “Ranil Rajapaksa.”

Outgoing president Gotabaya Rajapaksa (right) greets Ranil Wickremesinghe during the latter’s oath-taking ceremony as the new leader in Colombo, Sri Lanka, in July 2022. Photo: Sri Lankan President’s Office

In October 2022, the Sri Lankan parliament passed the 21st amendment to the constitution, which reinstated some oversight for independent commissions. Both Mahinda and Gotabaya Rajapaksa had undone such oversight mechanisms.

In December, the president and the SLPP passed a budget for 2023. The budget is in line with International Monetary Fund (IMF) goals for the country and has been criticized for prioritizing debt restructuring ahead of economic growth and inequality.

It also allocates around $1.5 billion for the security forces, which the government relies on to keep anti-regime protests under control.

In September, the IMF agreed to a $2.9 billion Extended Fund Facility and the Sri Lankan government hoped to have the mechanism finalized by December. But the inability to get China to agree to debt restructuring has delayed the process. The funds are unlikely to become available before March 2023.

China’s dithering has led to some negative sentiment. This is a surprising turn given how Sri Lankan media and politicians have historically self-censored any criticism of China. One member of parliament has even threatened to lead a “China Go Home” campaign similar to the “Gota Go Home” movement that ousted former president Gotabaya Rajapaksa.

The government does not plan to restructure concessionary multilateral debts. But debt restructuring with bilateral and commercial lenders coupled with the IMF funding will allow creditors and investors to engage with Sri Lanka with relative confidence. It is debatable if this would allow the island to reach GDP levels on par with 2019 by 2026, one of President Wickremasinghe’s goals.

Wickremasinghe had held the prime ministership before becoming president. During these stints, he consistently championed ambitious projects that have largely failed to materialize. Despite his pronouncements, Sri Lanka will likely experience more bankruptcies down the road.

Sri Lanka’s economy contracted by 9.2% in 2022. It is slated to contract another 4.2% in 2023. The upshot is that Sri Lanka will have lost nearly a decade of growth by the time it overcomes this economic crisis. It is a country that proudly reached upper-middle income status in 2019 only to be downgraded to lower-middle income status in 2020.

Some in the cabinet want Sri Lanka downgraded further to lower income status in the hope that this would allow the country to access concessionary loans. This all hints that the worst is, unfortunately, yet to come.

Neil DeVotta is a professor of politics and international affairs at Wake Forest University.

This article, republished with permission, was first published by East Asia Forum, which is based out of the Crawford School of Public Policy within the College of Asia and the Pacific at the Australian National University.

The article is part of an EAF special feature series on 2022 in review and the year ahead.

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