In July of 2022,
Sri Lankan citizens stormed and occupied the republic’s
presidential palace after months of demonstrations.
The protesters had one main demand: for the country’s
then-president Gotabaya Rajapaksa to resign.
You see, Sri Lanka was in the middle of a crippling
economic crisis, the worst the country had seen
since it claimed independence in 1948.
As a result, the island nation’s people struggled to get
their hands on essential goods like fuel, food and medicine.
It’s now synonymous with the worst economic crisis
in this country in decades.
And while some factors leading to the country's financial mess
were out of the government's control, political analysts
largely agree it was ultimately some major
policy missteps from Gotabaya Rajapaksa and his
powerful family that caused Sri Lanka's economic demise.
So, what do we know about the Rajapaksa family?
And how did we get here?
In June 2022, an investor sued Sri Lanka after the developing
nation defaulted on its debt for the first time in history.
In its lawsuit filed in a New York federal court,
Hamilton Reserve Bank accused the ruling Rajapaksa clan
of orchestrating the country's default.
For more than 70 years, the Rajapaksa dynasty has played
a key role in Sri Lanka's post independence politics.
A part of southern Sri Lanka's
rural elite, the family held numerous local
and regional government roles over the decades.
However, it wasn't until the 21st century
that the Rajapaksas rose to the national stage.
Not one, but two members of the family were elected
to the highest office in the land.
Mahinda Rajapaksa,
who was president from 2005 to 2015, and his younger brother
Gotabaya Rajapaksa, who was president from 2019
until he abandoned his office in July 2022.
Everywhere you pass, huge billboards glorifying
President Rajapaksa, as Sri Lanka's savior.
The brothers kept their relatives close.
During Mahinda Rajapaksa's second term in office,
more than 40 members of the Rajapaksa clan
were in government. Similar displays of nepotism
took place during Gotabaya’s presidency, with a third
of Sri Lanka's 28 ministries headed
by members of the family.
Now, it's worth mentioning Sri Lanka has a history
of influential families running the nation.
The Bandaranaikes, for instance,
produced one president and three prime ministers.
But we're here to discuss
the Rajapaksas and the decisions that tanked Sri Lanka's economy.
The current economic crisis is complicated, but can essentially
be traced back to two main causes: huge piles of debt
and shrinking foreign currency reserves.
Let's start by looking at Sri Lanka's enormous debts.
In May 2022,
the country defaulted on $51 billion of foreign debt.
It was the first time a country
in the Asia Pacific region had failed to keep up
with repayments since Pakistan in 1999,
according to credit rating agency Moody's.
External debt has more than
quadrupled since the Rajapaksas first came to power in 2005,
growing from about $11 billion to more than $50 billion,
of which around $38 billion was long term debt.
Its origins came from what some
considered the family's biggest success:
the end of Sri Lanka's devastating civil war.
More than 100,000 people died in the nearly three-decade-long
conflict, and most citizens were happy to see its end.
We, in Sri Lanka, are stepping into a new era of peace,
stability and renewed economic opportunities.
The country needed to rebuild.
And Mahinda's ambitions were big.
In 2007, two years before the end of the civil war,
the government launched a ten-year plan to invest
in infrastructure developments such as power, ports and roads.
One way Sri Lanka raised money
was by borrowing from international investors,
starting with its $500 million bond issue in 2007.
This is similar to a country handing out IOUs,
which pay interest in exchange for hard cash.
These bonds were sold in exchange for dollars,
leaving Sri Lanka needing to swap its rupees for the U.S.
currency when the time came to make payments.
All well and good, with enough foreign currency
in its reserves, but a potential disaster if not.
More on this later.
With its high returns,
Sri Lanka's bond issue was 3.2 times oversubscribed,
raising $1.6 billion from 136 investors.
It was the first installment of a borrowing binge that would
later come to haunt the country, with Sri Lanka racking up 14
international sovereign bond issues in 15 years.
While rating agencies consider the country's earlier bond
issues generally stable, this wasn't to last.
A year after the civil war drew
to a close in 2009, the IMF upgraded its assessment
of Sri Lanka to a middle- income emerging market.
While this upped its borrowing
credentials with many lenders, the achievement limited
the country's access to financing from institutions
like the World Bank and Asian Development Bank,
which offer loans below the market rate.
Still, foreign money poured
into the country as investor confidence grew,
including heavy investments by money managers on Wall Street.
Sri Lanka's newfound peace and capital appealed to voters,
and Mahinda Rajapaksa was reelected president in 2010.
But it was becoming clear
that the civil war resolution was far from a clean victory.
International organizations released reports of alleged war
crimes and human rights abuses during the conflict.
Have you held the independent inquiry?
Has it begun?
And in what form is it independent?
I’m sorry, we don't have to have so called
independent inquiries into any Tom, Dick and Harry allegation.
In response, many western
governments stopped sending foreign aid to Sri Lanka's
way, and that stream of income began to dry up.
Mahinda Rajapaksa was undeterred and instead turned
to China to fund his extravagant and expensive
"vanity projects" such as ports and an expanded central business
district in the capital, Colombo.
China became the country's largest foreign direct investor
in 2013, accounting for nearly a quarter of its inflows.
In the same year,
China launched its wide-ranging infrastructure strategy,
known as the Belt and Road Initiative.
China has been criticized
for its lending practices to poorer countries.
Its loans tend to have higher
interest rates and shorter repayment periods than those
given by Western governments and institutions.
It's also been hesitant
to provide debt relief for countries struggling to keep
up with repayments on interest bearing loans.
China is not the main source of the crisis, although there's
a big debt trap narrative going around.
For a better understanding
of how Sri Lanka's debt is split up, let's look at this IMF
report that was released in March of 2022.
The country's long term external debt in 2020 stood at
$38.7 billion, or 48.2% of its annual GDP.
The largest chunk of debt was owed to international sovereign
bond holders such as BlackRock, JPMorgan Chase and HSBC.
Multilateral lenders like
the Asian Development Bank formed the next largest group
of lenders, holding $8.8 billion of debt.
China was owed $5 billion, Japan around $3.5 billion,
while debts to India amounted to around $800 million.
Mahinda Rajapaksa failed to win a third term as president
in 2015, but his shadow still loomed large over the next cash-
strapped government, and it wouldn't be long before
the Rajapaksas were once again running the show.
Mahinda was appointed prime minister briefly in 2018
and again in 2019,
after his younger brother Gotabaya was elected president.
Gotabaya Rajapaksa's rise followed in the wake of a series
of terror attacks on Easter Sunday in April 2019.
The bombings targeted three
luxury hotels and three churches, killing 267 people.
Gotabaya Rajapaksa's platform
of tighter security policies and tax cuts resonated deeply
with voters and won him the election.
Shortly after he assumed office, he made good on his campaign
promise to slash taxes, a vow we now know reduced
the number of taxpayers by 1 million.
This was a massive problem
for a country already struggling with widespread tax evasion.
And then the pandemic happened.
Tourism, which made up 5.6% of Sri Lanka's GDP in 2018
and contributed revenues of $4.4 billion.
plunged to just 0.8% in 2020.
Remittances from Sri Lankans
workers abroad fell by 22.7% in 2021.
The Covid shock has affected growth;
it’s affected tourism, which then has an impact on
how much they will have in terms of FX money.
Then it has a spillover effect on public finances, and the
public debt is already really high.
The government was spending a lot more
than it was earning. By 2020, the three
main rating agencies had downgraded Sri Lanka’s
bond offerings to junk status, signaling the country was at
higher risk of default.
This was a major turning point because it meant the country
could no longer go to international markets to borrow
money. For years, it had been paying off
old debt with new debt.
This made it that much more difficult.
How committed and how confident are you that you
will be able to honor your debt commitments?
We are 100% committed, and uh... we are confident.
This is where Sri Lanka’s shrinking
foreign reserves come in.
Foreign reserves are the foreign assets a central bank
holds, such as gold or U.S. dollars.
Having these assets helps central banks keep their
region’s currency and economy stable.
The Central Bank of Sri Lanka’s reserves were running
low for several reasons:
1. The decline in tourism - fewer visitors were swapping
their home currencies for the local rupee.
2. Waning remittances – a big loss because these were
sent home in foreign currency as well.
3. A heavy dependence on on imports – paying for these
goods from abroad also requires foreign currency,
usually U.S. dollars.
4. Propping up the Sri Lankan rupee – the government kept its
currency’s value up by buying it themselves,
using foreign reserves. 5. Foreign debt – loan
repayments also require foreign exchange.
At this point, many countries go to the International
Monetary Fund for a bailout, but the Rajapaksas’
ultranationalist agenda was at odds with this option.
Seeking help from the IMF and the austerity measures that come
along with it was seen as undermining Sri Lankan
sovereignty. Instead, the Rajapaksas went directly
to countries like India, China, Bangladesh and Australia
for loans, as well as trying other homegrown solutions.
Is that really a sustainable solution?
Absolutely. Because if you don’t have the ability to go to the
markets right now and the prices are high, and there is a
dearth of funds out there, then you’ve got to
find alternative sources.
The government began
restricting supposed non- essential imports like fish,
footwear and wine in an attempt to protect
its foreign reserves.
But this caused shortages and pushed up prices.
The cost of food has nearly doubled, and overall inflation
now tops 60%. The war in Ukraine also
drove up energy prices, making it even more difficult
for the nation to import fuel. Long lines formed at petrol
stations, and daily power cuts became the norm for the
country’s 22 million people.
How long have you been waiting in this queue?
I’m waiting four days — Monday, Tuesday, Wednesday, Thursday,
like that. I’m buying three liters, 4,500 rupees.
How can I drive?
The president also banned chemical fertilizers and
pesticides in April 2021, forcing millions of farmers
to use organic methods instead. This move proved
disastrous for crops. Rice production fell by
20 percent six months after the ban was introduced.
Production of tea, the country’s top export, fell by 18 percent.
This worsened the food shortage, and with exports down, Sri Lanka
also lost a valuable way to replenish its foreign reserves.
Gotabaya Rajapaksa did U-turn eventually and gave in to
entering debt relief talks with the IMF – but it was too late.
Forced to decide between making payments to foreign lenders and
importing crucial goods, the country defaulted on its
debt for the first time in its history two months later.
There is gridlock, and there is misgovernance and incompetence
reigning in our country and 22 million people
are suffering.
Sri Lankans were furious. More than two-thirds of families
were struggling to get food on the table; all while allegations
were swirling about the Rajapaksas siphoning off
billions of dollars for themselves.
Go home, Gota! Go home, Gota!
President Gotabaya Rajapaksa resigned in July 2022.
Unfortunately, the nation’s problems won’t disappear
along with the powerful family. The country’s ninth president
Ranil Wickremesinghe isn’t the fresh start many Sri Lankans
were hoping for due to his close associations
with his predecessor. But if Sri Lanka wants to
overcome its economic obstacles, experts say what the nation
needs most now is stability Without it, there is always the
possibility that the Rajapaksas could claw their way
back into power.