Sri Lanka is a country held by the throat by debt, which no longer has enough money to import goods and provide essential services to the population, such as electricity, health care, transport or food supply. It is crushed by galloping inflation (up 30% in April). Gas pumps are dry, stores are empty, citizens have seen their living standards drop. Sri Lanka has become synonymous with total bankruptcy. On Monday, May 9, the crisis led to the resignation of Prime Minister Mahinda Rajapaksa, following violent clashes in the capital.
On April 12, the government temporarily halted payments to international creditors, marking a historic milestone in the economic and financial crisis ravaging the island nation of 22 million people. For the first time, Sri Lanka defaulted.
The causes of this monumental fiasco are well known: a massive debt of 51 billion dollars, of which 31 billion dollars is public foreign debt; a widening budget deficit due to populist tax breaks that were decided at a time when government coffers were empty; an agricultural reform that plunged the country into food insecurity; and, finally, the Covid-19 pandemic, which dealt a fatal blow to the tourist sector and caused expatriates to return to the country, drying up foreign currency receipts. On top of that is the impact of the war between Russia and Ukraine. "It's a combination of external economic shocks and policy errors," said Ganeshan Wignaraja of the Institute of South Asian Studies at the University of Singapore.
'A class of parasitic businessmen'
In the wake of the health crisis, the country's financial situation was sufficiently alarming to prompt the government to seek urgent assistance from the International Monetary Fund (IMF). But the Rajapaksa brothers ruling over the country preferred instead to continue borrowing and begging for lines of credit from its neighbors China and India, two rivals eager to strengthen their hold on the Indian Ocean island.
Those responsible for the disaster have been identified: the seeds of crisis were sowed by Mahinda and Gotabaya Rajapaksa, respectively prime minister and president. The eldest, Mahinda Rajapaksa, previously served as prime minister between 2004 and 2005, and then as president between 2005 and 2015. He was in power for 11 years, interrupted by four years in opposition, before becoming prime minister again before resigning for his younger brother, Gotabaya, who had a turn at being elected president in 2019.
It was during his tenure that the country went heavily into debt with China for infrastructure projects that have been proven not to be in the public interest, but which are suspected to have filled, as Amita Arudpragasam writes in Foreign Policy magazine, "the pockets of a politically connected, protectionist, and parasitic class of businesspeople." Mahinda Rajapaksa has done nothing to improve tax collection, a structural problem on the island, and has continued to provide tax exemptions to corporations and to the rich.
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