Sri Lanka's economic crisis: How one family bankrupted the hidden jewel

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Sri Lanka’s economic crisis: How one family turned this ‘hidden jewel’ into a basket case

The president went missing, his whereabouts unknown, as protestors stormed the whitewashed colonial-era mansion that serves as his residence. The prime minister’s private home, meanwhile, was set on fire. News that both would leave their posts triggered celebratory fireworks.

This was the scene in the Sri Lankan capital, Colombo, Saturday, as monthslong protests sparked by a crushing economic collapse reached a violent crescendo.

At the heart of the protests was an unprecedented explosion of public anger, directed toward one family: the Rajapaksas, a clan that has dominated Sri Lankan public life for years and is at the heart of the story of how this small and once vibrant South Asian island nation descended into a raging economic firestorm.

The situation in the runup to Saturday’s events was already dire: In the weeks prior, schools were shut, offices were closed and students were thronging the streets, calling for the ouster of the president. At gas stations around the country, forlorn motorists waited in miles-long queues as fuel stocks dwindled. In many cases, they waited in vain: Even if you could pay, the pumps were dry. And at local markets and grocery stores, you had to pay more and more: Food inflation had soared to more than 57 percent in May. The cost of nonfood essentials? Up more than 30 percent.

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This wasn’t some war zone or long-standing economic basket case, but a nation known to travelers as “Asia’s hidden jewel,” a small but strategically important country congratulated for a postwar “economic renaissance” and hailed by the World Bank as a “development success story.”

What happened on Saturday showed in the starkest of ways just how the story had changed, as Sri Lanka’s 22 million-strong population faced food and fuel shortages.

The country’s “renaissance” had followed the end of a brutal, decadeslong civil war, and it was heralded as an example for other conflict-ridden nations. Today, groaning under a staggering $51 billion pile of foreign debt that it can no longer service, Sri Lanka is deep in the red, locked in desperate talks for a bailout with the International Monetary Fund.

Ranil Wickremesinghe, who said this weekend that he would resign as prime minister as protestors stormed his home, had summed up the situation in an address to lawmakers last month: “Our economy has completely collapsed.”

What happened to Asia’s “hidden jewel” and to that “economic renaissance”? The answer involves the Rajapaksa family, a spate of bad decisions and the tide of inflation washing over much of the world.

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A family affair

Wickremesinghe had only come into the job in May, taking power because of waves of anger directed against the Rajapaksas.

Mahinda Rajapaksa, the patriarch, was the prime minister, and president before that; during his time as president, he appointed one brother as defense minister — that brother, Gotabaya, later became president, and as of Saturday night in Sri Lanka he was still missing.

Over the years, other Rajapaksa brothers, cousins and assorted relatives have populated various parts of the Sri Lankan political hierarchy — from the ministry for economic development to the irrigation department to senior positions in Parliament and other public institutions. Indeed, the extent to which the family tree matched the map of power in Sri Lanka was almost unprecedented in modern times.

“You had a ruthless and politically skillful family in a government system that gave them immense powers, which they misused,” Alan Keenan, a longtime watcher of Sri Lanka at the International Crisis Group, told Grid.

Mahinda Rajapaksa became president in 2005 and succeeded soon after in crushing the long-running rebellion by separatists from the country’s Tamil minority community. Both the Tamils and the majority Sinhalese forces were accused of war crimes during the conflict. In the aftermath of the horrors, Rajapaksa and his family entrenched themselves in every area of government.

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For a time, Sri Lanka prospered — at least on the surface; annual growth rose to around 9 percent in 2012. But as the family consolidated power, criticism grew within and outside Sri Lanka of the family fiefdom that the Rajapaksas were creating, and the corruption and mismanagement that came with it.

“Over time, what’s happened is that the Rajapaksas have made themselves the epitome of all the defects of governance that we have in the country, and they have exacerbated it by their corruption and their profligacy,” said Paikiasothy Saravanamuttu, one of Sri Lanka’s leading political commentators and the executive director of the Colombo-based Center for Policy Alternatives. “They have mismanaged government.”

Mahinda used his political clout to concentrate authority in the office of the president, pushing through constitutional amendments that gave him direct control of key government institutions. With the hierarchy populated by allies and family members, he faced almost no real checks on his power. Those who tried to stand up to him faced the wrath of the state: In a report in 2013, Amnesty International said that his regime “criminalized freedom of expression, and equated dissent with treason” in a bid to tighten its hold on the country. “Dissent,” the rights group said, “is a dangerous undertaking in Sri Lanka.”

At the same time, Rajapaksa and his brothers borrowed billions from international investors and big regional players to boost growth — most eye-catchingly from China, which funded a slate of infrastructure projects. The brothers borrowed with minimal oversight, pursuing what analysts at the London-based Chatham House think tank in 2020 called “a corrupt and unsustainable developmental programme.”

Leaked U.S. diplomatic cables from the early 2000s, when Rajapaksa embarked on his debt-fueled infrastructure building spree, also raised concerns about the motives of the Rajapaksa administration: “There is no strategic approach to developing the region and no coordination between the agencies responsible for the different projects. There also seems to be a lack of understanding, even within the business community, that a certain level of demand and investor interest is necessary for some of these projects to be successful.”


The China factor

In a strange twist, Sri Lanka was also hurt by its strategic importance. The country sits just south of India, a key maritime stop in the Indian Ocean. For the U.S. and its regional allies, India chief among them, it is a small but critical nation — “the fulcrum,” as the State Department put it in a 2019 brief, “of the Indo-Pacific region.”

Certainly China has recognized the importance of Sri Lanka, and recently it has done something about it. The Chinese influence is apparent the moment you land in Colombo, the capital; on the coast, stretching out into the Indian Ocean, is what is known as the Colombo Port City project. It’s being built — a la Dubai — on reclaimed sand from the sea; underpinned by $1.4 billion in Chinese funding, the port was officially launched in 2014 during a visit by Chinese President Xi Jinping. Mahinda Rajapaksa did the deal — and welcomed Xi for the opening. Further south, also on Rajapaksa’s watch, Chinese loans funded another sprawling port and a new airport as well.

That the investments were about more than just infrastructure became clear in late 2014, when Rajapaksa’s government allowed the docking of Chinese nuclear submarines at the port in Colombo — a development that caused alarm in both New Delhi and Washington.

Meanwhile, the Rajapaksas continued to borrow freely, and excessively — the loans from China were just one big example — and recently the bills have come due. It’s a debt crisis that has nearly everything to do with Sri Lanka’s economic collapse. The legacy of China’s involvement weighs heavily; as of 2019, China accounted for around 10 percent of Sri Lanka’s total foreign debts. And when Sri Lanka failed to make its debt payments on the giant port project in the south, Sri Lankans were forced to hand control of the port to China, under a long-term lease agreement. To many, the episode made Sri Lanka a poster child of what has come to be known as China’s “debt-trap diplomacy,” in which Beijing uses its growing wealth to lend to weak nations that are ultimately unable to pay back the loans — thus leaving them ever more dependent on Beijing. In Sri Lanka’s case, that dependence could have security consequences: With the southern port now in Chinese hands, the U.S. and India worry that Beijing may eventually end up using the port as a military base.

Yet China was hardly alone. Today, in addition to Beijing, Sri Lanka owes money to India and Japan, as well as to commercial financiers who bought its bonds in recent years. And here, too, the bills are coming due.

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House of cards

As the Rajapaksas borrowed their way to build infrastructure and boost Sri Lanka’s GDP, what they didn’t do was focus on building a sustainable economic base to pay for it all. It’s a key reason, say analysts, for the current nightmare.

“A lot of the high growth rates were debt-driven. A lot of the road building and infrastructure projects were funded on debt … either because they were Chinese projects or sovereign bonds,” Keenan said. The result, he explained, was that “the whole economy has been distorted.”

It didn’t help that the World Bank had reclassified Sri Lanka in the early 2000s as a “middle-income country,” a distinction that led to higher interest rates; previously, as a “low-income country,” it had qualified for discounted rates when borrowing from major international lenders.

For all the nepotism and poor management of the Rajapaksas, Sri Lanka also took two unrelated body blows. The so-called Easter Sunday bombings in 2019, which killed 261 people, damaged the Sri Lankan tourism sector, the country’s fastest-growing source of foreign currency earnings. The year before the bombings, in 2018, tourism earned the country $4.4 billion dollars and contributed 5.6 percent to its GDP, according to Reuters. Tourist arrivals fell by more than 20 percent in the year that followed. And then came covid-19, slamming the door on the tourism sector until earlier this year.

Ultimately, however, Kennan said Sri Lanka has suffered most from bad decision-making at the highest levels of government. “In many ways, the economic problem in Sri Lanka is a result of a governance problem.”

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Saravanamuttu, of the Center for Policy Alternatives, added: “A lot of the [governance issues and mismanagement] was a consequence of the concentration of power in the office of the presidency, because there is no real accountability or transparency in how that office functions at the end of the day.”

The farming fiasco

One story cuts to the heart of how that malfunction has hurt the country. And it involves a critical pillar of the Sri Lankan economy: farming.

In April 2021, the government banned imports of synthetic or chemical fertilizers. President Gotabaya Rajapaksa said the policy was designed to promote organic farming. The problem? The country, and the agricultural sector, which accounts for roughly 7 percent of economic output and employs 27 percent of the labor force, were woefully unprepared for the change.

The decision was taken despite experts arguing against it: Last summer, 30 leading Sri Lanka scientists and agriculture specialists wrote to the president, warning that a sudden shift away from chemical fertilizers would hurt the country. “A gradual approach will be wise to avert short-term crises,” they advised.

They were right. Widespread protests followed the introduction of the policy, forcing the government to roll back the ban at year’s end — but the damage had been done. The sector suffered for months.

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Domestic rice production dropped by some 20 percent in the six months after the policy was introduced. Analysts at Standard & Poor’s said that, even as the government banned fertilizer imports, it “neither increased the country’s organic fertilizer production capabilities nor imported organic fertilizers to meet farmers’ requirements.”

“Soaring food prices [in the wake of the fertilizer decision] resulted in social unrest across the entire country,” Ertharin Cousin, the former executive director of the World Food Programme, the United Nations food agency, told Grid. It fed — so to speak — the “political challenges the country is now facing,” she explained.

That local food-price crisis has now been joined by a global rise in the price of basic staples. For Sri Lanka, the scale of the food crisis is such that the government has approved a four-day workweek for public-sector workers, encouraging them to spend the extra day growing produce in their backyards.

For all the complaints and accusations against the Rajapaksa family, it was the spike in prices that finally broke its grip on power: Amid growing popular anger, Mahinda was forced to resign as prime minister in May. Now Gotabaya is reportedly set to follow in his footsteps.

With the prime minister, Wickremesinghe, also on his way out, what happens next remains uncertain. But it will only make the need for an IMF bailout — negotiations for which were, until this weekend, being led on the Sri Lankan side by Wickremesinghe — that much more urgent.

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Otherwise, as Wickremesinghe himself warned last month, the country looks set to “fall to rock bottom.”

Thanks to Lillian Barkley for copy editing this article.

  • Nikhil Kumar
    Nikhil Kumar

    Deputy Global Editor

    Nikhil Kumar is the deputy global editor at Grid, reporting on global affairs.

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