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World Affairs: Sri Lanka

Imploding island: Sri Lanka on brink of ruin

Print edition : Feb 11, 2022 T+T-
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At a demonstration against the shortage of essential commodities, in Colombo on January 5, 2022.

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President Gotabaya Rajapaksa arrives for the ceremonial opening of the second session of the ninth parliament, in Colombo on January 18, 2022 .

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Chinese Foreign Minister Wang Yi with Sri Lankan Prime Minister Mahinda Rajapaksa during an official meeting in Colombo on January 9, 2022.

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People queueing up to buy liquefied petroleum gas (LPG) cylinders in Colombo on December 31, 2021, as shortages of essentials gripped the island following a severe foreign exchange crunch that hurt imports.

Rank mismanagement is driving Sri Lanka to ruin. President Gotabaya Rajapaksa’s irrational policies coupled with serious economic problems have impoverished the nation, which is also reaping the fruits of playing India against China for a decade.

Crisis after crippling internal crisis is rocking Sri Lanka, even as the island nation struggles between an unyielding India, which is making some attempts to retain its pre-eminence in South Asia, and an assertive China, which is determined to extract its pound of flesh by using all means at its disposal.

The country is facing a serious food crisis exacerbated by irrational government policies forced on farmers (which were withdrawn later). On top of this, it is battling runaway inflation, an economy in the doldrums, the near-collapse of the electricity generation and distribution system, and the COVID-19 crisis. And the troubles do not end there.

The situation has been aggravated by gross mismanagement by President Gotabaya Rajapaksa and his coterie of favoured friends and former Army colleagues, who have displayed their incompetence in many of the jobs they have been entrusted with.

When he assumed office in 2019, riding a wave of fear after the Easter terror attacks on churches and hotels which killed over 250 that year, President Gotabaya Rajapaksa was the biggest hope for a strong and safe Sri Lanka.

That image is now in tatters. In its place is a person increasing seen as a liability, one who is hastening the decline of Sri Lanka with his obstinacy, irrational ideas and undependable policies.

Also read: All at sea: India-Sri Lanka relations turn increasingly fragile

Taking the current situation into consideration, the Canadian government issued an advisory to its citizens on January 14, stating: “The deteriorating economic situation is affecting the supply of basic necessities and the delivery of public services. Keep supplies of food, water and fuel on hand. Monitor local media for information.”

Six days later, the Sri Lankan Foreign Ministry protested in a long-winded press release, in which it claimed that the Canadian advisory included “erroneous and outdated information” that did not “reflect the actual situation in Sri Lanka”.

A troubled economy

Sri Lanka’s biggest problem is its economy. It faces a particularly tough year, since it has to pay as much as $6.9 billion in debts in 2022. With a precarious foreign exchange reserves situation, and not much hope for an early revival given the third wave of COVID-19, it treads a dangerous path, with the looming possibility of sovereign default amid growing public restlessness.

Economists writing in major newspapers have asked the government to prioritise ensuring food for people over paying up maturing foreign bonds and loans. But the government is in no mood to listen to them.

On January 18, when a $500 million sovereign bond matured, Central Bank of Sri Lanka (CBSL) Governor Ajith Nivard Cabraal announced that Sri Lanka had kept its promise and repaid the amount. This was done by selling gold, cashing in on currency swap arrangements with China and India, asking the big banks to stop opening letters of credit, and maintaining control on most imports. By doing this, Sri Lanka has kept its record clean of not defaulting on international debts.

Every move of the government invites widespread criticism, which resonates with the ever-suffering public because of the runaway inflation.

Harsha de Silva, MP and former Minister, tweeted on January 15: “Has ‘Never-to-IMF’ governor @CBSL sold last remaining 3.1 tonnes of Sri Lanka gold reserve? There is speculation that he has.”

He added: “Kicking the can down the road a bit further with India ACU 2-month delay of $515 million. Moving closer to unprecedented socio-political-economic catastrophe.” He was referring to the two-month deferral of the Asian Clearing Union (ACU) settlement of $515 million facilitated by India. The ACU is a payment arrangement among nine Central banks in Asia.

Also read: One law, many problems

The situation was worse a few months ago. In November, it seemed Sri Lanka would not be able to repay. By end-November 2021, its foreign exchange reserves had depleted to $1.6 billion, barely enough for a month’s import of essentials, leading to a slew of foreign exchange control measures that were described as “too harsh” by many people belonging to the middle class.

By December, most rating agencies had downgraded Sri Lanka’s sovereign ratings because of perceived default possibilities in 2022. As on January 18, Sri Lanka, which cashed in on a Chinese currency swap arrangement and managed to lift its reserves to just over $3 billion, had managed to keep the default at bay.

India also had a role in ensuring that Sri Lanka did not default: after tough negotiations, it offered a $400-million currency swap to Sri Lanka. India has also offered a $1-billion line of credit to buy food and medicines, and bought some grace time with the ACU. On January 18, India announced “a new Line of Credit of $500 million to Sri Lanka for purchase of petroleum products”. The CBSL “deeply welcomed” the India-Sri Lanka “understanding” which would “greatly stabilise Sri Lanka’s external sector further”. The announcement came at a time when Sri Lanka’s main electricity generation plant, Sapugaskanda, had halted production since it ran out of furnace oil and at a time when the Indian subsidiary of Indian Oil Corporation, LankaIOC, informed the Ceylon Electricity Board that it could not supply fuel because it did not have enough stocks.

A release issued by the Indian High Commission in Colombo said: “External Affairs Minister Dr S. Jaishankar extended this critical support in his letter addressed to the Foreign Minister of Sri Lanka, Prof. G.L. Peiris…. These measures are in line with India’s commitment to stand with Sri Lanka, contribute to Sri Lanka’s economic growth and impart greater momentum to bilateral economic and commercial partnership.”

There is just one sign of hope—a revival in tourism, with international arrivals rising to about 3,000 a day. But another major source of revenue—foreign remittances—is fast drying up. Since the Sri Lankan government wants to artificially hold the U.S. dollar to the Sri Lankan rupee at a rate of 200, it appears that foreign workers’ remittances are coming back to the country via the hawala route.

The Sri Lankan website www.publicfinance.lk reported: “Sri Lanka’s worker remittances were down 60 per cent from a year earlier to $325.2 million in December 2021, with foreign exchange diverted to the unofficial market as money printing undermined the credibility of 200 to the U.S. dollar peg. Full-year 2021 official remittances were down 22.7 per cent to $5,491.5 million.”

Alarmed, the CBSL put out a few messages to arrest the trend. One such message on Twitter on December 27 said: “Are you sending money from a foreign country to Sri Lanka or from Sri Lanka to a foreign country? If so, by using informal money transferring mechanisms, you could unknowingly become part of a money laundering or a terrorist financing ring.”

India, China in Sri Lanka

India and China stepping in to help Sri Lanka out of its current financial crisis is the only example of the two Asian giants working together with the purpose of bailing out a struggling economy. Sri Lanka, in trying to play India against China, has mostly not got the results it desired.

India-Sri Lanka relations worsened after the the war with the Liberation Tigers of Tamil Eelam (LTTE) ended in 2009. An increasingly self-assured Sri Lanka took away from India a piece of land in the prime Duplication Road (RA de Mel Mawatha) in Colombo in 2011 and gave it to China for commercial development. India had planned to use the land for construction of residences for its diplomats and other officials. It has been a rocky road from then on. Sri Lanka tried to repeatedly tell India that the government processes took too long to complete and its development needs were better serviced by China.

Former President Mahinda Rajapaksa once told this correspondent: “India takes too long [to clear a project]. So we are forced to go to China or others.” But a former Indian diplomat, who was once stationed in Colombo, said that this was not entirely true: “In India, we have checks and balances but there is no inordinate delay. I know of at least one instance where a proposal was given to us and just over a week later, also given to China.” The Chinese approved it faster.

The game of playing India against China went on for close to a decade.

To date, India has not taken over a project it executed owing to non-payment by Sri Lanka. (According to officials, almost all the large projects have massive grant components.) But that is not the case with China. China has taken over the Hambantota port because Sri Lanka failed in its obligations to service the debt.

Also read: Which way Sri Lanka?

There are more such white elephant projects that have proved to be a burden for Sri Lanka. They include the Lotus Tower, the Mattala Mahinda Rajapaksa Airport and the Hambantota convention centre. India had expressed interest in the airport, which is considered the world’s emptiest airport, but Sri Lanka has been reluctant to agree to an Indian takeover. India and Japan wanted to develop a part of Colombo Port, but Sri Lanka, after initially agreeing to the proposal, handed over the project to China. It later stated that another similar expansion project would be given to India. A large chunk of India’s exports and imports are routed through Colombo Port. The only Indian ‘success’ of late has been Sri Lanka’s decision to finally hand over a part of the Trincomalee oil tank farm to India for development. A part of this Second World War structure, built by the British to store petroleum products, will be jointly developed with the Ceylon Petroleum Corporation. But even this decision came after more than a decade of negotiations.

China has been pushing its agenda with a force rarely seen in international relations. At the conclusion of the visit of Chinese Foreign Minister Wang Yi in the second week of January, China said in a release that China-Sri Lanka relations “do not target a third party and should not be interfered with by any third party”. The third party referred to here is India. The statement came against the backdrop of a Chinese company being forced to shift its solar energy project from north Sri Lanka to the Maldives.

Wang Yi also proposed to form a forum on the development of Indian Ocean island countries, The Hindu reported on January 11. This forum is expected to cement China’s position as a major development and trade partner with south Asia’s smaller economies. This forum “sounded similar to Prime Minister Narendra Modi’s SAGAR (Security and Growth for All in the Region) initiative”, the report said.

Indian projects

India chose the day Wang Yi landed in Sri Lanka to inaugurate an India-funded intercity train. A release issued on January 9 by the Indian High Commission said: “A ceremony to start Mount Lavinia to Kankesanthurai Intercity services using recently received Full AC Diesel Multiple Units (AC DMUs) from India under Indian loan facility was held on January 9, 2022. Sri Lankan Minister of Transport Ms. Pavithra Wanniarachchi was the chief guest.” The release added: “India's total development portfolio in Sri Lanka is over $3.5 billion, of which around $570 million are purely grant projects. Modernisation of Railways and creation of new Railway infrastructure have been important sectors of focus under the Indian government’s development portfolio in Sri Lanka, in line with the priority of the government and people of Sri Lanka.”

On January 14, the day of the Tamil harvest festival Pongal, India handed over 1,000 houses built for hill country Tamils using an Indian grant. The Indian High Commission said: “Indian Housing Project is a flagship development assistance programme in Sri Lanka which is being carried out in different phases. 46,000 houses were built/repaired in northern and eastern Provinces of Sri Lanka in the first two phases. Another 10,000 houses shall be constructed in the plantation areas in the next phase. This would take Government of India’s overall commitment under the project to 60,000 houses.” Meanwhile, in Colombo, China’s 665-acre, $1.4-billion island hub is getting ready.

On January 16, a long queue of Sri Lankan citizens waited patiently to enter the public viewing gallery of the Chinese-built Port City in Colombo, a vast swathe of land reclaimed from the Indian Ocean and marketed to ordinary Sri Lankans as the next big financial hub of the world. The ‘city’ has been in the making for nearly a decade, and China wants to showcase this as a unique project in South Asia, largely to deflect attention from the fact that most Chinese projects across the island nation are defunct or barely functional.

Also read: Under fire

Sri Lankan citizens critical of the government were quick to point out that similar queues were seen when a host of other Chinese projects were opened; as on date these projects do not have a single serious investor. Given the Chinese track record in Sri Lanka, murmurs are getting louder on how much the ‘relationship’ with China has cost Sri Lanka. This comes at a time when everyone in the island nation is feeling the pinch of the economic downturn, which shows no signs of abating. Even the President’s January 18 address to parliament was high on rhetoric but did not lay down a workable plan that ordinary Sri Lankans were looking for.

The embattled President is trying all means to pass the blame to others. In one recent instance, NewsWireLK tweeted him as having said: “When I received 69 lakh votes [when he contested], don’t forget that 52 lakh voted against me [actually 55 lakh]. Their job is to criticise the work the government does.”

A cornered Gotabaya does not enjoy the luxury that his brother Mahinda or the Presidents before Mahinda Rajapaksa had of being able to blame every problem on the LTTE, specifically LTTE leader Velupillai Prabhakaran. With the obliteration of the LTTE and the killing of its chief, there is no one else left for the Sinhala rulers to blame.

Gotabaya Rajapaksa, the man who led the war against the LTTE, is now facing the fate of all COVID-era rulers: a bleak future.

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