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Sri Lanka’s Devastating Economic Crisis Continues

Brussels (16/11 – 83)

Sri Lanka is still dealing with the aftermath of its most devastating economic crisis since independence, a government without popular support and intensifying geopolitical competition in its neighborhood, a year after the Sri Lanka’s massive unrest. Known as the Aragalaya protests which were spurred by the economic crisis, the protests led to mass resignations across the government with former President Gotabaya Rajapaksa fleeing the country in July 2022.

In the year since, the country has secured an IMF agreement, and its economy has ambled toward a slow path of recovery. However, there have still been concerns on the human rights front as the current government of Ranil Wickremesinghe has clamped down on further protests and continually postponed elections.

Sri Lanka’s economy appears to be making a slow and steady recovery, but its governance challenges must be addressed to sustain the momentum. Its domestic politics, economics and foreign relations have evolved one year after the country-wide protests.

The government of Wickremesinghe, who was elected president by the Sri Lanka Podujana Peramuna (SLPP), the party of the once politically dominant Rajapaksa family, is engaged in sustained efforts to enact repressive laws that stifle dissent and curtail the freedoms of media and civil society. Since parliamentary elections have not been held in the aftermath of the political crisis the current government is the same as the one headed by Gotabaya, the only difference is that Wickremesinghe is the president. Although the conditions of the IMF bailout package have pushed the government to propose some reforms, such as a new anti-corruption law, the lack of political will makes it unlikely that these initiatives will precipitate change in government behavior. Particularly since those in Parliament are the very same people who were part of the Gotabaya Rajapaksa regime and responsible for the multi-dimensional crisis with which Sri Lanka is still grappling. These parliamentarians have been reportedly demanding ministerial portfolios from Wickremesinghe to continue their support to him, thereby demonstrating the ongoing corrupt political culture and lack of accountability.

The military continues to acquire land in the north and east to expand military camps. Security agencies and the military have continued their surveillance, intimidation and harassment of civil society organizations, the media, families of the disappeared, former combatants and Tamil political and civic activity in conflict-affected areas. The draconian Prevention of Terrorism Act, which does not adhere to international human rights standards and the implementation of which has resulted in human rights violations, is still on the statute books. As part of the Sinhalization of the north and east, which has rapidly escalated, Hindu temples are being destroyed and in their place Buddhist temples being built.

There has also been no progress in holding perpetrators of human rights violations related to the war accountable. Nor has there been any attempt to provide a political solution to the ethnic conflict or undertake substantive constitutional reform. Instead, to avoid being subject to the scrutiny of the U.N. Human Rights Council, the government is proposing the establishment of the National Unity and Reconciliation Commission, its version of the truth-seeking mechanism, while hundreds of recommendations of similar previous commissions remain unimplemented. 

The 2022 protests did ignite increased public discourse on issues of public interest and demands for accountability, at least on certain issues, such as how public funds are spent and corruption. Yet, the decades-long rights struggle of communities, such as the Tamils, which have challenged the state and particularly the Rajapaksas, was largely absent in the narrative and the consciousness of the protesters.

Increased political awareness among the southern public has the potential to be the beginning of the acknowledgment of historical discrimination and repression, which should ideally result in the south heeding and addressing calls for truth, justice and equal citizenship. Such realization can lead to a pluralistic and diverse Sri Lanka where one would not have to divest one’s ethnic or religious identity to be Sri Lankan.

Hence, legal reforms alone will not change the way Sri Lanka’s institutions and politicians behave and perform. To ensure that the momentum generated in 2022 for accountability from elected representatives evolves into sustained challenges to entrenched systems of discrimination and corruption, the root causes of Sri Lanka’s crises and the multiple elephants in the room must be addressed.

Sri Lanka defaulted on its international debt a year ago, after facing unprecedented inflation and a balance of payments crisis. In sight of securing a new IMF program, Sri Lanka’s relationship with New Delhi has grown considerably stronger along economic and diplomatic lines, while their already close defense ties are largely unchanged. By contrast, China’s response has been highly disappointing to Sri Lanka, which continues to wait on Beijing’s full cooperation in debt restructuring.

India’s economic support to Sri Lanka predates the 2022 crisis. In 2020, New Delhi agreed to a $400 million currency swap under the South Asian Association for Regional Cooperation (SAARC) framework. For more than a year, India was reportedly silent on whether it would approve Sri Lanka’s requests for an additional $1.1 billion currency swap and a moratorium on bilateral debt. Since early 2022, however, India’s support for Sri Lanka has been unprecedented. New Delhi perhaps realized the trendline of the impacts to the south was increasingly linked to its own economic and security interests and the credibility of its “neighborhood first” diplomacy.

The nature of support has been mostly lines of credit, currency swaps and deferred repayments. In January 2022, India provided another currency swap of $400 million under the SAARC framework. It also deferred settlement of $2 billion in Sri Lanka’s Asian Clearing Union trade credits, which are mostly for imports from India. In February 2022, it offered a line of credit worth $500 million for importing fuel from India, and the following month it provided a credit facility of $1 billion to buy food and medicine from India and further aid worth roughly $72 million. No less significantly, in January 2023, New Delhi provided the first assurances to the International Monetary Fund to enable the latter’s $2.9 billion package. Recently, India extended its $1 billion credit line for another year and appears likely to offer Sri Lanka a 12-year term to repay its debts. Later this month, President Wickremesinghe will make his first visit to India since entering office.

Beyond economic and diplomatic ties, India continues to be Sri Lanka’s primary defense partner. In the past year, the Sri Lanka Air Force has received a Dornier maritime surveillance aircraft from India, while the two countries held their annual defense dialogue in February and the Sri Lanka-India naval exercise, SLINEX, in April.

In contrast, China has been mostly uncooperative despite being Sri Lanka’s largest bilateral lender. Earlier, it had offered a currency swap worth $1.5 billion that was subsequently criticized because Sri Lanka could not benefit from its stringent terms. It also offered another $500 million loan with interest in 2021. Most importantly, China’s reluctance to actively participate in the debt-restructuring process with other lenders has cemented deeply held concerns about its transactional approach to Sri Lanka and other growing economies. Earlier this year, China finally agreed to a moratorium on debt servicing to Sri Lanka for only two years. But questions remain about whether Beijing will deliver on its assurances about debt restructuring.

Nevertheless, Sri Lankan officials representing their smaller state cannot afford to criticize China. Instead, officials emphasize their hope that Beijing will cooperate on the debt crisis and in other areas of the relationship. Wickremesinghe is expected to visit China in October to seek foreign direct investment in several projects, including for a potential $4 billion oil refinery in Hambantota.

Source: USIP