Sri Lanka: debt crisis and the fall of a nation

Hemantha Withanage, Chair of Friends of the Earth International, explores the debt crisis and the dynamics that led to protests in Sri Lanka — from an international debt crisis to rampant hunger, poverty, and political turmoil, caused by an undemocratic, neoliberal regime.

After over 100 days of public protest, Sri Lankan President Gotabaya Rajapaksa finally resigned on 14 July 2022, ending his 32-month presidency from his refuge in Singapore.

Since 9 April 2022, citizens have occupied the entrance to the Presidential secretariat in the heart of Colombo, Galle Face Ground, in a strong display of people power. At the peak of the protest on 9 July, they occupied the Presidential House, Presidential Secretariat, Prime Minister’s official residence and Prime Minister’s office, demanding that the President go home. He escaped to the Maldives in an Airforce plane deep in the night of 12 July, and travelled to Singapore when the United States refused him visa entry.

Oligarchal rule of the Rajapaksa family

Prior to the President’s resignation, his brother and former Prime Minister (PM) Mahinda Rajapaksa resigned on 9 May. During his final address, politicians from his party, Sri Lanka Podujana Peramuna (Sri Lanka People’s Front), roused supporters to attack the peaceful protesters, in turn stoking more anger. Riots broke out across the country, in which more than 70 properties belonging to ruling party politicians were burned down, at least one Parliament member died, and hundreds of vehicles were burned and damaged.

One month later, on 9 June, his younger brother Basil Rajapaksha, a US citizen, resigned as Finance Minister. He had been appointed a few months prior, violating the constitution which prohibits dual citizens to run for Parliament. The Rajapaksa family had three other family members holding Cabinet Minister and State Minister positions in the ruling regime.

Altogether, the Rajapaksa family controlled up to 70% of the national budget. They have been accused of abuse of power, nepotism, corruption, and looting public money to invest in other countries like Uganda, Seychelles, Dubai and Australia. An International Consortium of Investigative Journalists investigation named Sri Lanka as one of the “impoverished and autocratic nations” from which billions of dollars was poured out, into private accounts listed under the names of shell companies and trusts, often hidden from courts, creditors and law enforcement.

Soon after the former PM’s resignation, President Gotabaya appointed Ranil Wickramasinghe, a seasoned politician from a once-popular party which only got one seat in the last election. Disappointment and anger grew among the protestors, who have been calling for all 225 members of parliament to leave. Before fleeing the country, Gotabaya appointed Wickramasinghe as Acting President. Despite the lack of support from opposition parties, with few other candidates available, Wickramasinghe managed to drum up support to become the 8th President of Sri Lanka on 20 July.

This political crisis will continue to damage democracy in the country, until a proper election is held which allows people to choose a new regime. This task looks impossible, as the constitution does not allow for the dissolution of Parliament unless there is a two thirds majority in Parliament calling for the impeachment of the President.

From debt crisis to political crisis

The political crisis erupted from the economic crisis which has crippled Sri Lanka since the start of 2020. The International Monetary Fund deemed that the country lost their debt sustainability in September 2020, when its debt level increased to 101% of its income. The Government quickly blamed the COVID-19 lockdown for the loss of tourism income and lower levels of remittances from Sri Lankans working abroad, as well as lower productivity in the textile and other industrial sectors. This may have been a tipping point, but the debt crisis was already a reality long before the pandemic.

Sri Lanka owes more than $51bn (US dollars) to foreign lenders, including $6.5bn to China.

To fill the gap, the government printed over 2.3 trillion Sri Lankan rupees (equivalent to $6.5bn USD), a move which has catapulted Sri lanka’s inflation to the highest in Asia — from 29.8% in May 2022 to an all-time high of 54.6% in June.

Food insecurity and energy poverty

Meanwhile, back in 2020, the government stopped importing vehicles, palm oil and some other “non-essential” items.

Most famously, they banned all chemical fertilisers in May 2021, claiming to transform the country to agroecological farming overnight. Yet, as they failed to put in place support for the agricultural transition, farmers were left unable to cultivate, lost incomes, food prices skyrocketed. As hunger rose, politicians suggested that people reduce their daily three meals to only two. Six months later, the government back-peddled, and began importing nano nitrogen from India and municipal solid waste-based organic fertiliser from China. When the National Plant Quarantine Department found dangerous bacteria in the shipments, agriculture experts, civil society and the media started campaigning against these imports. The Center for Environmental Justice (CEJ/Friends of the Earth Sri Lanka) filed a legal action to block the unloading of a shipment, forcing it to return to China after paying a $6.7 million delay fee.

Agroecology is a practice and movement with hugely transformative potential to feed the world and replace the destructive industrial food system. The Sri Lankan experience only goes to show the importance of public policies and support for farmers through such a transition.

The lack of foreign currency reserves also meant that the government couldn’t import enough gasoline, diesel, liquefied natural gas (LNG) or coal to keep the country’s fossil fuel-dependent system running. Queues formed in every fuel station across the country. Chaos ensued, over 30 people died. Changing the Liquefied petroleum gas (LPG) formula to make more profits resulted in dozens of deaths nearly 730 domestic gas cooker explosions. There were long power cuts as thermal power stations stop running, until the rainy season came a month ago. But even now, hydropower sources are draining fast and people are facing 3-4 hours of power cuts per day. Essential services such as healthcare, food distribution and public transport have been severely affected, with no solution to date.

The need for a global just energy transition is urgent, to tackle the climate crisis and build energy sovereign nations. In Sri Lanka however, there is strong resistance to renewable energy from fossil-addicted experts and politicians, backed by coal and gas producers.

Despite the government’s policy to introduce 70% renewable energy by 2030, the Ceylon Electricity Board Independent Engineers Association has blocked any construction of renewable energy sources. Since the 1990s, the environmental community has struggled against this “coal mafia”, whose fossil addiction has left the people in a state of energy poverty.

A poor environmental record

The environmental destruction begun by the previous regime multiplied under President Gotabhaya Rajapaksa. He deregulated sand transportation licenses and released biodiversity-rich “Other State Forests” for agriculture and development, saying his verbal orders alone must be considered as law. The environmental community fought back – for example when over 2000 citizens protested in Colombo in April 2021 – but were ignored by the ruling regime.

Friends of the Earth Sri Lanka filed more than 25 environmental court cases against the current regime in the last 32 months, some of which were able to reverse such decisions, such as re-establishing the sand mining licence.

Recently, hungry people have started grabbing natural forests and cultivations for illegal mining and other forms of income generation to survive. According to Global Forest Watch, the loss of primary forests in Sri Lanka was 283ha in 2020 and 281ha in 2021. Tree cover losses of 11,200ha in 2020 increased to 13,300ha in 2021.

Illegitimate debt, corruption and false solutions

The Sri Lankan experience provides an important learning on how neoliberal policies can bring any country into crisis. Sri Lanka currently owes $81.7bn to multilateral and private creditors. 78% of the debt occurred during the rule of the Rajapaksas.

Private creditors, including Black Rock and others, have recently created a bond holders group covering about 30% of the country’s debt. From 2003, these private bond holders started providing funds to Sri Lanka, back when the country was on the path to upper-middle income level. Since then, the two regimes have borrowed enormous sums of money from bond holders with the higher interest rate, to invest in infrastructure. These are easy monies for the oligarchy to misuse – according to protestors, at least $19bn was siphoned off for use elsewhere.

Hamilton Reserve Bank Ltd., which holds more than $250mn of Sri Lanka’s 5.875% International Sovereign Bonds filed a lawsuit in June 2022 in a New York federal court seeking full payment of principal and interest. Other bond holders, including US retirement systems, Fidelity Investments, BlackRock, T. Rowe Price, Lord Abbett, JPMorgan, PIMCO, and Neuberger Berman are in the queue to restructure lending.

A number of projects have been overestimated and paid through corrupt procedures. According to the Auditor General, one of the irrigation projects to divert the Gin and Nilwala rivers was paid more than 4000mn Sri Lankan Rupees, without any basic work done on the ground. The failed project to divert the Uma Oya river – funded by Iran at approximately $529m – led to a tunnel collapse which harmed farm lands and buildings in the Bandararawela area, destroying farmers’ incomes. To date, the project remains incomplete.

Meanwhile, the China-funded project to build “Colombo port city”, which would be the financial hub of the Belt Road Initiative, has also deepened debt. To date, the developers have not even paid the royalties owed to the government for sand and rock material mined from the ocean and countryside – amounting to 465mn Sri Lankan Rupees.

Hambantota Harbour, recently built with a loan from China, has been leased out to the Chinese company for 99 years due to Sri Lanka’s inability to pay the debt. However, the leased amount (approximately $1bn) has not returned to the National Treasury but instead been invested in unknown infrastructure. Both Hambantota Harbour and Colombo Port City have no or minimal benefits to the Sri Lankan economy, while their environmental and social damage is very high.

Finally, a study of national budgets over the last six years reveals that 44% of all foreign borrowings have been for roads and expressways. The total financing cost would exceed $9 billion, yet the procurement process has been highly controversial and and faced corruption allegations.

As the government’s foreign currency reserves went down, the Central Bank of Sri Lanka declared that they were unable to pay off loans, and Sri Lanka became a bankrupt nation in May 2022. Around 40 international sovereign bonds account for over one third of Sri Lanka’s $51bn of foreign currency external debt. The solution pushed by the government is to ask for help from the International Monetary Fund (IMF).

Yet, since the existing public debt is so high, the IMF would require “adequate financing assurances from Sri Lanka’s creditors that debt sustainability would be restored” before they can design a comprehensive economic programme for the country. Meanwhile, China is pushing another loan ($4 bn) to pay existing debt, and Sri Lanka has also negotiated Indian and Chinese credit lines to bring essentials like fuel in to the country. The World Bank has agreed to lend Sri Lanka $600m, and India has offered at least $1.9bn. The IMF is discussing a possible $3bn loan. These measures are not really helping to resolve the debt crisis.

It is rumoured that some public entities, such as the Ceylon Electricity Board and Sri Lankan Airlines, will be privatised to reduce the burden to the national budget. Over 1.5 million public sector jobs may be cut to save costs. These will not be easy measures.

Meanwhile, The Nature Conservancy, a western NGO, is interested in buying back $1bn of Sri Lankan debt for a lower rate under the “Debt for nature swap”. This mechanism was previously pushed by the US government under the Tropical Forestry Conservation Act, which Sri Lanka opposed in the late 1990s as it threatened national sovereignty and peoples’ rights over natural resources. This time, The Nature Conservancy would sell biodiversity credits and carbon credits for marine ecosystem conservation to Coca Cola and other big companies, which would be devastating for local fisherfolk. The “Debt for nature swap” mechanism is an example of financialisation of nature – a false solution to the biodiversity and climate crises, that further concentrates the power of financial corporations over the environment and livelihoods. If this one goes ahead, Chinese banks and the Nordic Investment Bank will be next in line to grab more natural resources.

Humanitarian crisis

The Sri Lankan crisis is a crisis of politics, economy, environment, food, healthcare, energy, debt and humanity. Sri Lanka has become a fallen nation resulting from a failed government, and a failed neoliberal financial system. People who can afford to leave are in the passport queues. The government is encouraging people to go to the Middle East to bring in foreign remittances, which will only spell a rise in labour exploitation and migration.

As always, the poorest are the most affected. It was reported that nearly 5.7 million women, children and men are in need of immediate life-saving assistance. According to a survey by Save the Children, more than 2 in 3 families do not have enough to eat. 85% of households have lost income since the onset of the economic crisis, with 1 in 10 losing their entire income. 3% of the families surveyed said they had turned to “emergency-level” coping strategies such as selling homes, child labour, child marriage, begging, theft or sex work.

The situation has sharpened the vulnerability of women and children, who are more likely to suffer abuse, malnourishment, deterioration of health and exploitation. There are stories of families who committed suicide as parents were unable to provide food for their children, others attempting to reach India or Australia by boat.

Experience in countries like Argentina and Zimbabwe that went through severe economic crises has shown that it can take more than a decade to build back to ‘normal’. Young people feel little hope for the future.

Our actions and demands

Democracy has severely deteriorated in the country and no one trusts one another. Although the civil space somewhat increased during the early days of the people’s protests, it has been shrinking rapidly after President Wikramasinghe was appointed on 20 July. Yet, civil society must keep fighting against the undemocratic, neoliberal ruling regime which caused this crisis. We call for the solidarity of the civil society movement in this difficult moment, to:

• Build the social security net by providing support to needy people.
• Actively engage in broadening civil space and ensure that there are no human rights violations.
• Demand that the parliamentarians bring an immediate end to the political crisis and establish a stable government.
• Conduct a public debt audit and demand debt cancellation including all illegitimate debt.
• Increase lobbying/influence on the multilateral creditors and developed nations to provide unconditional support, to avoid the debt crisis.
• Ask for internationalist solidarity to support local communities – especially humanitarian support for food, medicine and other essential items.

Friends of the Earth International will continue to fight for global-level policies to tackle social and environmental crises, and build people’s power. The current dominant economic system cannot provide solutions. It is time for system change.