Explanation-How Sri Lanka descended into crisis

By Devjyot Ghoshal and Alasdair Pal

COLOMBO (Reuters) – Sri Lanka’s economic crisis appears to have finally toppled President Gotabaya Rajapaksa.

Rajapaksa has not commented directly but plans to step down on July 13, the country’s speaker of parliament said on Saturday, bowing to intense pressure after a violent day of protests in which protesters stormed the official residence of the President and burned down the Prime Minister’s house in Colombe.

Anti-government protesters angry over blackouts, commodity shortages and rising prices have long demanded that Rajapaksa step down, but the retired military officer has resisted demands for months, citing government powers. urgency to try to maintain control.

The violence and political chaos gripping the island nation of 22 million come amid negotiations with the International Monetary Fund (IMF) over a bailout, as well as proposals to restructure its sovereign debt, which could both be upset.

HOW DID IT GET TO THIS?

Analysts say economic mismanagement by successive governments has weakened Sri Lanka’s public finances, leaving national spending above income and the production of tradable goods and services at inadequate levels.

The situation was exacerbated by major tax cuts enacted by the Rajapaksa government shortly after taking office in 2019. Months later, the COVID-19 pandemic hit.

This wiped out much of Sri Lanka’s revenue base, including from the lucrative tourism industry, while remittances from nationals working abroad plummeted and were further undermined by an inflexible exchange rate. .

Rating agencies, concerned about public finances and its inability to repay large external debt, downgraded Sri Lanka’s credit ratings from 2020, ultimately excluding the country from international financial markets.

To keep the economy afloat, the government has relied heavily on its foreign exchange reserves, eroding them by more than 70% in two years.

The crisis has paralyzed Sri Lanka, once considered a model of a developing economy. Fuel shortages have led to long queues at gas stations as well as frequent power cuts, and hospitals are running out of medicine. Runaway inflation hit 54.6% last month and could reach 70%, the central bank said.

WHAT DID THE GOVERNMENT DO?

Despite the rapidly deteriorating economic environment, the Rajapaksa government initially suspended talks with the IMF.

For months, opposition leaders and some financial experts have urged the government to act, but it has held firm, hoping tourism would rebound and remittances recover.

Eventually, realizing the scale of the brewing crisis, the government sought help from countries like India and China, regional superpowers that have traditionally vied for influence on the strategically located island.

India has provided billions of dollars in loans to help pay for vital supplies. In total, New Delhi claims to have provided support worth more than $3.5 billion this year.

China intervened less publicly but said it supported the island nation’s efforts to restructure its debt.

Earlier in 2022, Rajapaksa asked China to restructure repayments of around $3.5 billion in debt owed to Beijing, which in late 2021 also provided Sri Lanka with a 1.5 billion yuan-denominated swap. dollars.

Sri Lanka finally opened talks with the IMF.

WHAT HAPPENS NEXT?

A sitting president ousted by street protests is unprecedented in Sri Lanka’s post-independence history.

Rajapaksa’s decision to step down, however, is likely to add to the country’s political and economic uncertainty.

Sri Lanka’s constitution states that if a president steps down, the country’s prime minister will assume the role.

But incumbent Ranil Wickremesinghe said he too would step down.

It was therefore likely that parliament speaker Mahinda Yapa Abeywardena would temporarily assume leadership of the country, until lawmakers elect a new president to complete the rest of Rajapaksa’s term, which is due to end in 2024, said constitutional expert Jayadeva Uyangoda.

(Reporting by Devjyot Ghoshal and Alasdair Pal; Editing by Raju Gopalakrishnan)

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