The Crisis Within

Analysts have argued that the country’s exports gathered momentum in 2021 and tourists returned to the country with. Even so, the decline in revenues due to sweeping tax reductions, untenable borrowing practices and excessive money printing had already caused irreversible damage.

In April 2021, Gotabaya devised another policy that would become the final nail in his political coffin. He urged farmers to eschew chemical fertilizers and entirely focus on organic farming. In hindsight, the notion of a complete break from tried-and-tested farming practices seems a tad bizarre as even developed countries have sustained themselves through hybrid agricultural techniques. Gotabaya’s policy drew the ire of farmers as agricultural output dwindled at an unprecedented rate. The situation spiralled out of control as rice -- a staple food and crop in Sri Lanka -- had to be imported. Food prices consequently soared to unimaginable heights.

Since 2020, credit rating agencies had already begun to downgrade the island nation. Two years later, the agencies’ confidence in the country began to plummet. Fitch, the New York-based ratings agency, reduced Sri Lanka’s sovereign rating to “restricted default” when the country failed to make international sovereign bond payments, even after being granted a 30-day extension. A similar assessment was made by S&P Global Ratings, another ratings agency, when it claimed a default was a “virtual certainty” in Sri Lanka’s case. Snubbed by these entities, the island nation was extricated from the global capital market. As a consequence, the country lost a key avenue through which it had sought to fulfil its debt obligations and had to rely instead on its foreign reserves. Once these reserves were geared towards debt repayment, it became all the more difficult to purchase imports. Shortages in fuel, food and medicine were witnessed across the country. These developments increased the inflationary pressure on the economy.

As the country plunged deeper towards a downward trajectory, the government’s response remained tepid. From the outset, the Rajapaksa administration struggled to respond effectively to the challenges. Despite pressure from the opposition and economic pundits, the government didn’t prioritize negotiations with the IMF and laboured under the illusion that tourism revenue and remittances would miraculously recover.

As the crisis escalated, the administration borrowed money from India and China

When Sri Lanka finally resolved to go to the IMF, the Rajapaksa regime vehemently opposed a bailout solution put forward by the IMF and gave preference to a home-grown strategy. The decision had an adverse effect on the country’s gold and foreign reserves. With time, the people lost confidence in the inefficient Rajapaksa regime.

Soon after severe fuel shortages were reported, the Ceylon Electricity Board initiated long power cuts. The announcement sparked mass protests. In late March, demonstrators thronged Rajapaksa’s private residence -- a move that laid the foundation for a chain of events that led to Gotabaya’s resignation a few months later.

Sri Lanka’s debt crisis has its genesis in the political arena. Ironically, the fallout was also of a political nature. However, it is the people who suffer the most under these circumstances. The IMF has tentatively agreed to give Sri Lanka a loan worth $2.9 billion. This isn’t a viable solution to the people’s immediate predicament as the loan will be disbursed in another six months and will come with its own conditions. The road to recovery is expected to be turbulent as no quick-fix strategy can easily reverse the perils associated with Sri Lanka’s economic downturn.