Crisis in Colombo
Written on August 25th, 2022 by {"login"=>"jcbphc21", "email"=>"f20181005@hyderabad.bits-pilani.ac.in", "display_name"=>"Journal Club, BPHC", "first_name"=>"Journal Club", "last_name"=>"BPHC"}On 15th March 2022, tens of thousands of supporters of the largest opposition party of Sri Lanka, the Samagi Jana Balawegaya (SJB) led by Sajith Premadasa, carried out protests in front of the president’s office, demanding his resignation. This was one of the first major incident that later turned into one of the largest public protests that Sri Lanka has ever seen. People of all ages and belonging to different fields joined these protests. But all these people had a common aim, a common demand which was, the then President of Sri Lanka, Gotabaya Rajapaksa should resign. What led these people to hate their own president to such an extreme? Well simply, his policies that caused a massive economic crisis in Sri Lanka. Yes, Sri Lanka is facing the biggest economic crisis it has seen since it gained independence. Inflation has skyrocketed and people are struggling to buy things of basic necessities because of shortages. Some products that are available have become too expensive for people to afford them.
The obvious question that arises now is, why did such economic crisis occur? So, let’s look at the events that led to this crisis in the island country.
COLLAPSE OF TOURISM INDUSTRY:
About 12 to 13% of Sri Lanka’s GDP came from tourism. However, in April 2019, multiple bomb blasts shook the nation. These blasts were conducted by a local Islamic terrorist group. This in turn led to anti-muslim riots across the country. These events not only disturbed the communal harmony of the country but also heavily impacted the tourism sector. In the following year the covid-19 pandemic began, which lead to a complete collapse of the tourism industry. This resulted in the contribution of tourism industry to the GDP to fall drastically to 0.8%.
TAX RELAXATIONS:
Under the presidency of Gotabaya Rajapaksa, the Sri Lankan government introduced significant tax cuts, which include the abolishment of the Pay as You Earn (PAYE) tax and the 2% “nation-building tax”, increased tax-free threshold, reduction of corporate tax from 28% to 24%, and VAT reduced to 24%. The logic behind these tax cuts was that if taxes are low then people will spend more which will have a positive impact on the economy.
However due to the pandemic, lockdowns were imposed and so even though the taxes were low the people could not spend. Thus, these tax cuts unlike predicted, brought a negative impact on the economy since the expenditure of the government had increased but their income was reduced due to the tax cuts. The budget deficit widened significantly to 11.1% of GDP in 2020 and 12.2 % in 2021 from 9.6 % in 2019. It increased the government debt to GDP ratio to 100.6 %in 2020 and 104.6 %in 2021 from 86.9 %in 2019
AGRICULTURAL CRISIS:
In April 2021, the Sri Lankan government announced that Sri Lanka would only allow organic farming, banning all types of inorganic fertilizers and agrochemical-based fertilizers. This decision was taken with a good intention however a complete ban was imposed overnight. Inorganic fertilizers may not be good for health but an immediate stopping of their use causes a short-term decrease in crop productivity. The same happened in Sri Lanka and a 20% drop in rice production was seen in the first six months. Thus, forcing a country that was self-sufficient in rice production, to import rice for $450 million. The decline in tea production caused an estimated loss $425 million. Seven months later, the Sri Lankan government abandoned its plan to become the world's first organic farming nation. It lifted the bans on urea and imported 44,000 Tons of urea under the line of credit.
FOREX RESERVE LOSS:
Foreign exchange reserves or forex reserves are the financial assets managed by the central bank of a country and are used or paying to other countries i.e., for import and export purposes. Since January 2020 till December 2021 the forex reserves of Sri Lanka decreased by a whopping 70%. This was mainly due to the low exports and increased usage of forex reserves due to the pandemic and agricultural crisis. Moreover, forex reserves also fell as Lankans across the globe lost jobs. Reduction of forex reserves means increased difficulty in importing goods. Since Sri Lanka relies on imported goods for items of basic needs like sugar, pharmaceuticals, cereals etc, there is a massive shortage of these items in Sri Lanka.
Although the economic crisis has many causes a major contributor to it are the policies of the Sri Lankan government. This explains the anger of the citizens towards there government.
As the protests intensified several significant incidents occurred in Sri Lanka. On April 1, 2022 president Rajapaksa declared emergency to curb the protests. On 3rd April all the 26 cabinet ministers resigned from their posts. Later on, a new 17-member cabinet was sworn in. The president was hoping that these measures would pacify the people but on the contrary the protests kept on intensifying. People now started setting camps outside president’s house and continuously voiced their demand. There was clash between the protestors and supporters of the Rajapaksas outside the official residence of the Prime minister. After this incident the protests became violent. Houses of many politicians were torched and destroyed. The police started taking severe measures to counter the protests. Amidst this chaos, on 12 May the prime minister Mahinda Rajapaksa resigned from office. He was succeeded by Ranil Wickremesinghe. The new Prime Minister again declared emergency and ordered the military to do “whatever is necessary to restore order”.
The protestors however, were still adamant on their demand of President’s resignation. This was due to the fact that in Sri Lankan political system, the President has equal and in some cases more power than the Prime minister of the country. So, he is considered equally responsible for the policies of the government. This is unlike the Indian system where President is only the de jure head of state.
So, after months protest and agitation, finally Gotabaya Rajapaksa decided to resign. But hours before he was expected to resign, he fled to Maldives. In his absence he appointed Mr Wickremesinghe as an acting President. However, the next day Gotabaya Rajapaksa sent his resignation and Mr Wickremesinghe was officially sworn in as the acting president. Later he was elected as the new President of Sri Lanka by the Parliament. He appointed Dinesh Gunawardena as the Prime Minister. The protestors wanted his resignation also, as many consider him a loyalist of the Rajapaksas.
The crisis in Sri Lanka still continues. It is predicted to linger for some time as there is no immediate solution. It has been reported worldwide that Sri Lanka is in talks with many countries, including India and China, for loans on credit lines. It is also in talks with world bank and the International monetary fund. Meanwhile Gotabaya Rajapaksa is now expected to return to the country. However, it also been revealed that he has applied for a US green card. The emergency in Sri Lanka has also ended and President Wickremesinghe has confirmed that it won’t be extended further.
The protests have mellowed down, the news has become stale, but the people in Sri Lanka are still struggling. Now, after the departure of the Rajapaksas it would be interesting to see how and till when the new government in Sri Lanka revives the Island nation out of this crisis.