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The long road to Sri Lanka’s $52 billion debt default

Protestors continue to throng the streets of Colombo (Photo: twitter/@SriLankaTweet)

Sri Lanka began its Sinhala and Tamil New Year celebrations on a sombre note. In his new year message on Thursday, President Gotabaya Rajapaksa said: "The current economic and global crises have become the biggest challenge faced by us Sri Lankans in our recent history. We should overcome this challenge with unity and better understanding".

The President's message came two days after the nation announced that it will default on its $51 billion loans. The island nation's unprecedented catastrophe is its first such crisis and a big ignominy for the government.

Appeal for loans and aid
The country's new Finance Minister Ali Sabry said that Sri Lanka needs between $3 billion to $4 billion to pull itself out of the economic crisis and has pinned hope on the International Monetary Fund (IMF) for the same. He also said that some of the money will come from governments and other lenders as well.

Newspaper Ceylon Today said: "Sabry, along with newly appointed central bank Governor Nandalal Weerasinghe, is a key member of Rajapaksa’s team for bailout talks with the IMF. The funds are crucial to the success of a debt restructuring process initiated by the island nation this week after suspending some outstanding loan and interest payments".

Heightened political activity
The misgovernance and the precipitous decline in Sri Lanka's fortunes have the opposition baying for the powerful Rajapaksa family. Opposition leader Sajith Premadasa plans to move three motions before the parliament. One is to impeach President Rajapaksa who has stubbornly refused to quit despite public pressure. The second is to move a no-confidence motion against the government and the third is to move the parliament to real the 20th amendment that bestows executive powers on the president undermining the parliament and the prime minister.

Rajapaka's political allies–the Sri Lanka Freedom Party (SLFP) led by Maithripapa Sirisena also plans to make a clean break from the Rajapaksas. Just a few days earlier Sirisena and his party members were holding talks with the president to convince him to quit and hand over the country to an all-party administration.

The road to bankruptcy
Currently the nation is supposed to have about $500 million in foreign exchange reserves, which is pennies for a country. Because of low forex reserves since the middle of last year, the island nation had to steadily reduce imports of food and other essentials. It also had to reduce oil imports, completely stopping these at times. All these measures eventually lead to shutting down of its only oil refinery, long power cuts, queues for fuel and a collapse of its economy.

The country is facing a food shortage partly because of disastrous governance. Last year the president decided to make Sri Lanka the first organic nation in the world and banned the import of chemical fertilisers. This decision brought down its food production considerably, causing a food crisis and resentment among farmers.

China's huge infrastructure projects were tom-tommed by the Rajapaksas and brought in large amounts of investments but did not support its economy. Experts say the Chinese investment, also called debt diplomacy, in the Mattala Rajapaksa International Airport (MRIA), the Hambantota port and the Colombo Port City only added to the debt burden of Colombo. Experts add that such mega infrastructure investments for such a small nation are not sustainable.
The April 2019 Sunday Easter bombings by the global terror organisations eroded international tourist confidence leading to a loss of tourism earnings. The Covid-19 virus and the subsequent lockdowns across the world added to the woes, wreaking havoc on the nation's tourism-based economy putting a complete squeeze on its foreign exchange earnings.

Chinese games
With China not responding to Colombo's appeals of providing it $2.5 billion in financial aid, Sri Lanka has begun talking to the IMF. During Chinese Foreign Minister Wang Yi's recent visit to Colombo, Sri Lanka had appealed to the communist leadership for restructuring its loans. Despite the bonhomie between China and the Rajapaksa family, Beijing has simply ignored both the appeals–restructuring loans and releasing financial aid–by a fast friend and ally.

To add to the country's discomfort, China had in fact sent a ship of contaminated organic fertiliser. After Sri Lanka rejected to take delivery of the poor-quality fertiliser, China anchored the ship in Sri Lankan waters for months in a coercive attempt. Eventually, China levied a fine on Sri Lanka and the ship initiated arbitration proceedings in a Singapore tribunal. India had to step in to provide organic fertiliser to Sri Lankan farmers.

Indian support
The then Finance Minister Basil Rakapaksa flew into Delhi to meet with External Affairs Minister S Jaishankar and Finance Minister Nirmala Sitharaman in October 2021. Soon after his visit, India readied a $1.5 billion line of credit package consisting of food, fuel and other essential items, which have bailed out Sri Lanka till now. Sri Lankan cricketers and opposition leader Sajith Premadasa have acknowledged that India stood by the people of Sri Lanka in its time of need.

Just yesterday, New Delhi said that it is thinking of providing another $2 billion in aid.
Next steps
Sri Lanka now has an enormous burden on its hands. It has to pacify its people and instill confidence among them. It has to reduce the lines for fuel, quickly deliver food to people and bring down prices. All of these measures are to ward off starvation and likely humanitarian problems.

At another level, Sri Lanka also has to improve its governance and strengthen its economy. It will have to generate local employment, begin manufacturing goods, support the farmers with fertilisers, bring in tourists, utilise its vast coastline for marine industry and start to export goods and services that it has not yet tapped.

Meanwhile, people continue to protest and camp at the iconic Galle Face seafront.

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