Sri Lanka’s 75th Year of Independence Marred by Economic, Political Woes

Sri Lanka’s 75th anniversary arrives at a moment of peril and, perhaps, possibility for this nation of about 21 million in the Indian Ocean. 

Transcript

Dinesha de Silva (00:03):

How will Sri Lanka's democracy revitalize itself amidst the complex politics of post-authoritarian Sri Lanka? Who knows? But my hope for Sri Lanka's future lies with the social movement and the young people who led it. For me, that is kind of a glimmer of hope.

Tracie Yang (00:22):

Reading the tea leaves in a tumultuous Sri Lanka today on InAsia from The Asia Foundation. I'm Tracie Yang.

John Rieger (00:29):

And I'm John Rieger. It's a fascinating time in Sri Lanka, a moment of peril and perhaps possibility for this island nation of about 21 million in the Indian Ocean. Once admired as a model of economic development, Sri Lanka has been in turmoil since the country defaulted last April on its foreign debt.

Tracie Yang (00:48):

The event has sent tremors through the economy, creating widespread suffering and political protests among a population that still harbors some of the divisions of the 30-years civil war that ended in 2009.

John Rieger (01:00):

Joining us today, with an overview of the country of which she is a native daughter, is Dinesha de Silva, the Asia Foundation's country representative in Sri Lanka. Dinesha, welcome to InAsia.

Dinesha de Silva (01:11):

Thanks, John and Tracie. It's wonderful to be here.

Tracie Yang (01:14):

So let's talk about the economy. Where are we? And how did we get here?

Dinesha de Silva (01:19):

We are here in February of 2023, which interestingly is the 75th anniversary of Sri Lanka's independence. We're certainly in a more stable moment compared to the events of last year, but Sri Lanka is still in a very, very precarious place. The Sri Lankan Rupee has depreciated by almost 80% since March of 2022. This has driven up inflation, because Sri Lanka's import-dependent for energy for food and industrial inputs. It was a lack of foreign exchange that drove the severe shortages of critical imports last year. If you remember from the newspapers, lines for cooking gas, for transport fuel and so on, some of that has stabilized. Gas is more freely available now. Fuel is rationed, but one can go to a gas station and use the national QR code system to get 20 liters. There are still some food items that are not available. Medicines are still very, very difficult to find.

John Rieger (02:30):

This is a shocking scenario for a country that had previously been admired for its development trajectory.

Dinesha de Silva (02:38):

I agree, John. I mean, I think it's a precarious part. In terms of your second question, Tracie, I mean, how did we get here? If we look back, say a decade or so, Sri Lanka's current economic free fall was a foregone conclusion really, driven by years of fiscal indiscipline, low taxes, risky commercial borrowing, historical factors, like the structure of the domestic economy. I mean, it was entirely reliant on the export of primary commodities, like tea, rubber, and coconut. And as such, the country is reliant on imports of essential food items, like food grains, pulses, milk, and sugar. Then there's the conundrum of how do you balance a high quality of life, provide free services and free education, in a country with very low taxes. Sri Lanka has one of the lowest tax rates in the world, reaching a low of 8% in 2022, unmanageable. I mean, how does one actually run a country without that tax revenue, right?

(03:44):

And then on top of that, you had two huge policy errors by the previous government. Towards the end of 2019, and in early 2020, before the pandemic, the government enacted a massive tax cut in fulfillment of an election promise. So the government just went into an incredible crisis, because there was just no revenue coming in. And then in May of 2021, came this decision to ban chemical fertilizers overnight. The farmers were asked to shift to organic fertilizer. And this resulted in a huge reduction in rice yield, as well as vegetables, and, of course, tea, which is one of the key exports of Sri Lanka.

(04:31):

Compounding all these were a series of external shocks the economy and the society had to bear, starting with the Easter bombings, which choked tourism, also with everyone else in the world, the impact of the COVID pandemic. But between the loss of tourism earnings and these two policy errors, the Sri Lankan economy just went into a free fall.

Tracie Yang (04:54):

How has this fiscal disaster affected daily life in Sri Lanka?

Dinesha de Silva (05:00):

Well, Tracie, I would say that one of the most serious and debilitating impacts of the economic crisis has been the mass exodus of young people trying to relocate overseas, looking for opportunities in Australia, Canada, the EU, and the US. This is a huge drain of Sri Lanka's human capital, and one which will have longstanding repercussions. Would you believe that the demand for new passports increased 250% during 2022?

John Rieger (05:31):

Holy cow.

Dinesha de Silva (05:32):

Unbelievable. And last September, the association of Government medical officers announced that 500 doctors had left the country during the first eight months of the year, leaving huge gaps in what was once a world-class health and hospital system. The government itself is fueling this exodus by lowering the minimal age at which women can migrate for work overseas, from 25 to 21. And a no-pay leave scheme has been announced by government, encouraging civil servants to seek employment overseas for five years and still retain their retirement benefits.

John Rieger (06:09):

Dinesha, it sounds like the government is trying to outsource its salary obligations.

Dinesha de Silva (06:14):

Exactly. I mean, very much trying to take, as I said before, short-term kinds of solutions for a very big structural problem. The other impact we're seeing, John, of course, is the ongoing power cuts. They're around two hours and 20 minutes a day at the moment. And the power and energy minister recently announced that, if tariffs are not hiked up, we could end up with six to eight hours of power cuts soon.

Tracie Yang (06:40):

Wow.

Dinesha de Silva (06:40):

The other thing that we are observing is that this economic crisis, since it has impacted so much on people's lives, in terms of their livelihoods, we're seeing a significant increase in petty theft and robberies, particularly vehicle theft as spare parts care not being imported, and they're impossible to find. There's quite an alarming increase of shootings and reports of abductions and kidnappings. And with food inflation soaring, you can imagine the impact on households, right? Last December, the World Food Program released a report that one-third of Sri Lankan households do not currently have a secure source of food, and that 70% of families are reducing their meal sizes.

John Rieger (07:30):

Sri Lanka has been negotiating for an IMF bailout, but the IMF has held back, because of concern over some of Sri Lanka's bilateral creditors. In particular, Chinese lending, which represents about 14% of the national debt, is encumbered with provisions that make coordinated debt restructuring difficult. Has Sri Lanka been dealing with the devil, so to speak?

Dinesha de Silva (07:57):

It's a complex situation, John, in that, yes, China is most certainly the largest bilateral creditor for Sri Lanka. And China's role in Sri Lanka's debt restructuring has come under a lot of scrutiny. A recent analysis, actually by two young economists, has pegged the debt to Chinese creditors broadly at around 7.3 billion, which is closer to 19.6%. And then just to unpack that a little bit, Sri Lanka borrowed heavily from China, from the government of China, as well as from China Exim and China Development Bank. So one needs to somewhat separate the two debts in some way, because debt restructuring is connected with the government. The banks, they are government-connected, but they operate independently, so you can't really expect them to act in concert together in debt restructuring, although I think many countries that are supporting Sri Lanka's efforts aren't really demanding that. The Chinese [inaudible 00:09:12] ministry made a statement yesterday that they will do all that they can to support Sri Lanka's debt sustainability, and that China will work with Sri Lanka, and that the Chinese banks will try to formulate a kind of unified approach to debt restructuring in Sri Lanka. But it's difficult, I think, for China to rethink, because any given decision that it takes also has implications for other countries.

John Rieger (09:40):

And of course, China currently has a domestic debt sustainability issue as well.

Dinesha de Silva (09:45):

Mm-hmm. Exactly, exactly.

Tracie Yang (09:47):

Well, Sri Lanka's difficulties servicing its Chinese debt has been growing for some time, eventually leading the country to hand over a major port as partial payment. That port has now hosted, among other vessels, a Chinese missile submarine. Is that a disturbing development?

Dinesha de Silva (10:10):

I think one could take it as a disturbing development. The docking of the satellite and missile tracking vessel, this Yuan Wang 5, in Hambantota last year was largely seen internationally as Beijing using its economic clout to extend its power in the region. And judging from the reaction, of course, it did cause some considerable disquiet in India. The Sri Lankan position actually has been to downplay any perceived threats and security concerns, focusing on balancing interests and on the revenue aspects of ships like this coming into Sri Lanka's ports. This is a big issue for Sri Lanka to think about, given its strategic location in the Indian Ocean, right? It really needs to carefully balance its interests and tread very carefully. And I think the government of Sri Lanka is very conscious of that.

(11:12):

Apart from having to balance relations between China and India, Sri Lanka is now a host member of the Colombo Security Conclave with India, Maldives, and Mauritius. And interestingly, in July of 2022, that's almost a month before the submarine incident, Sri Lanka, with these other three countries, resolved to join hands to ensure maritime safety and security, to fight terrorism and radicalization and trafficking and organized crime. So you can see that Sri Lanka is trying to play a balanced and careful role.

John Rieger (11:55):

Last summer, many of us were transfixed by the public protests that came to be known as the Aragalaya. What was the Aragalaya? And what did we learn about the Sri Lankan public from those protests?

Dinesha de Silva (12:08):

Oh, so the Aragalaya was an amazing moment. Aragalaya means people's uprising or struggle, and it really ignited everyone's imaginations and opened up a lot of interesting debate in Sri Lanka. In many ways, John, the Aragalaya was unprecedented in Sri Lanka, its scale, its spread, its impact. I mean, he brought together Sri Lankans of all ethnic hues and class and religion. And they were brought together, because of the suffering of the economic crisis and also their shared resolve that they wanted to oust the person or persons, who were responsible for the situation they found themselves in. So it was extraordinary, the massive mobilization of people, it was like a kind of Woodstock, music and drama and art. And everybody trying to learn; lectures were held. But the focus was the protest, to try to pull the rug from under the all powerful Rajapaksas.

(13:16):

And it was successful. It prompted mass resignations from the government at the time. And interestingly, I think it opened up really an interesting moment, new spaces for dissent and discussion on reform. The achievement was colossal, really. It was an extraordinary moment for Sri Lankans, for Sri Lanka. And it was a moment, which potentially should have given an opportunity to cleanse politics and bring in a more inclusive standard of government. But the challenge is, how do we set Sri Lanka on that path? Because the Aragalaya lost its momentum in the wake of the deepening crisis, the arrest of several leaders. But it was really a glorious moment, I think, in the trajectory of Sri Lanka's history. And one hopes that its repercussions will continue to resonate in Sri Lankan politics and social spaces.

Tracie Yang (14:16):

The Aragalaya actually drove President Rajapaksa from office quite literally. I mean, he fled the country until last July. Rajapaksa's a polarizing political figure and a member of a political dynasty, who is remembered as defense minister in his brother's administration, for bringing the civil war to a shockingly violent end. Do you see the current events in Sri Lanka leading to a change in the nation's political culture?

Dinesha de Silva (14:48):

I would hope so. Back in August, we were doing a political economy analysis for a new project that we were undertaking. And we went out to the provinces, and we talked to 52 political leaders across national, political, and local levels, and asked this question, "What did the Aragalaya do in terms of... How did it change the nation's political culture? Is it changing?" And many of them responded to us that it certainly triggered a major introspection within political parties in Sri Lanka, and that there was a wide recognition that citizens trust in political parties had fallen to an all time low, and that was well demonstrated in the Aragalaya. But while representatives of the smaller political parties stated that the Aragalaya had forced them to rethink the quality of the candidates that they wanted to put forward for any potential upcoming elections, the kind of more traditional mainstream parties were quite silent about this when we spoke to them. And perhaps it was too early.

(16:01):

However, I think that across the political spectrum, there is the consensus that the compact between citizens in Sri Lanka and their political representatives has radically altered. Even though after all of what happened with the Aragalaya, the same 225 people are members of Parliament are still there. I suppose we're going to find out in the coming weeks. Local government elections are scheduled for March. And one hopes that, as people go to vote, they will remember the aspirations of the Aragalaya and maybe use the opportunity for transformative change.

John Rieger (16:43):

Dinesha, this may be a bit of a tangent, but just pursuing this question of the political situation in the country. I read last month that another former prime minister had been ordered by the court to personally compensate the victims of the Easter bombings. Remind us what those bombings were. And what does it mean to hold a former political office holder personally liable? Is that a good sign or a bad sign for Sri Lankan politics?

Dinesha de Silva (17:11):

I think the Easter bombings were unprecedented. I mean, they were bombs that went off in multiple locations, particularly focused on churches and five-star hotels in Colombo. In January, as you say, Sri Lanka's Supreme Court held unanimously that former President Maithripala Sirisena and a former defense secretary and two senior security and intelligence officials, that they had violated the fundamental rights of the victims by failing to prevent the attacks, because we learned later that there had been some advanced information that had forewarned the government, but they did not take action. And so the Supreme Court ordered them to pay personally into a victim's fund, the value of nearly US $850,000 total. Given the verdict has just come in a country that is getting ready for local government elections, I wonder what the implications of that will be. Potentially, the verdict could have some devastating consequences for former President Sirisena's political career. So is it a bad sign or is it a good sign? I think accountability is good. Accountability is good. But what impact the timing will have on the situation in Sri Lankan politics? That's hard to tell at the moment.

John Rieger (18:39):

So it sounds like it would be fair to just say it's a big mess.

Dinesha de Silva (18:44):

Well, it's a complicated situation, I would say.

John Rieger (18:48):

That's what I meant to say.

Tracie Yang (18:51):

So Doctor, if Sri Lanka were your patient, what would you prescribe for this complex of maladies that has laid the country low?

Dinesha de Silva (19:02):

Oh my goodness, Tracie, what a difficult question. How will Sri Lanka's democracy revitalize itself amidst the complex politics of post-authoritarians Sri Lanka? Who knows? It's really hard to say whether the current members of parliament and the fractured political parties that are in the country at the moment, who have been jockeying for power this past year, I don't know that they are necessarily up to the task. But my hope for Sri Lanka's future lies with the social movement and the young people who led it. There was an extraordinary level of citizen commitment focused on demanding the kind of government that people need and want. And it was an extraordinary, principled, non-violent, creative, and passionate appeal that we saw last year, captured all our imaginations. For me, that is kind of a glimmer of hope, that would keep us going amidst these troubled times, and the hope I think I have for Sri Lanka's democratic future.

John Rieger (20:10):

The Asia Foundation's Dinesha de Silva, thank you for joining us today.

Dinesha de Silva (20:14):

Thank you so much, John and Tracie. It was wonderful to talk to both of you.

Tracie Yang (20:19):

And that's the InAsia podcast for this week. We hope you enjoyed it.

John Rieger (20:23):

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Tracie Yang (20:27):

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John Rieger (20:36):

And I'm John Rieger.

Tracie Yang (20:38):

We'll see you then.