Poor handling of an economic crisis that’s causing double-digit inflation, rolling blackouts and acute medical and fuel shortages, lead to the resignation of Prime Minister Mahinda Rajapaksa, after months of mass protests against the Sri Lankan government. With dwindling forex reserves and a defiant government, economic decision-making moved from bad to worse leading to severe and often violent political deadlocks.
This is a jarring testament of post covid world order. The gloomy 2022 Davos Summit highlighted three inter – related crisis in food, fuel and finance. These are ripping through poorer economies of the Global South like Sri Lanka, threatening to stoke unrest and push more into crisis.
The Sri Lankan anarchy is a cumulative result of
- economic mismanagement by successive governments. Examples include an ill-timed tax cut gifted as an election pledge in 2019 which decimated government revenues,
- the reversal of a ban on chemical fertilisers in 2021 which had a deleterious impact on agricultural output,
- a mismanaged currency which provoked severe shortages of basic items such as food, fuel and medical supplies.
With the advent of Covid-19 pandemic and the Ukraine conflict, spelt further catastrophe for the island nation which is heavily reliant on tourism for economic sustenance also battling global supply chain disruptions
The government declined IMF help for months, despite appeals from opposition and good counsel from economists, this amidst a worsening financials, which left foreign exchange reserves perilously low at around $2.31 Bln, as of February 2022, with debt payments around $4 Bln.
Inability to service loans from China foe massive and not useful infrastructure, lead to Colombo’s suspended foreign debt repayments in a desperate attempt to conserve its dwindling foreign reserves for essential fuel and food imports.
With the Lankan crisis emerging as ‘a text book’ example of a larger Chinese debt trap diplomacy stratagem – there are probably many more such examples within the PRC’s Belt and Road Initiative. While China had agreed to strengthen Sri Lanka’s foreign currency reserves by swapping the Lankan rupee for its currency, the Renminbi, it has been reluctant to move forward after the International Monetary Fund came into the picture.
Is this the tip of what is coming?