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In early July tens of thousands of angry Sri Lankans poured into Colombo, the capital, to chase President Gotabaya Rajapaksa and his government from office. They stormed the presidential palace, swam in the president’s pool and showered in his bathrooms. Rather than face the protesters, Mr Rajapaksa went into hiding for several days before fleeing on a military plane. He resurfaced in Singapore and at last tendered his resignation, putting the prime minister in charge. His departure marks the end of his family’s two decades of political domination. An all-party interim government may soon take over. How did Sri Lanka end up in this position?
The immediate reason for the political crisis is the disastrous economic situation facing the island’s 22m people. Sri Lanka’s economy has been in free fall for months. Tourism, a big source of foreign currency, ground to a halt during the pandemic and had just begun to recover when Russia’s invasion of Ukraine pushed up commodity prices, making imported fuel and food harder to afford. The Sri Lankan rupee has declined by 45% against the dollar since the central bank abandoned its peg in March. The government had spent months frittering away its dwindling foreign-exchange reserves on propping up the currency and servicing foreign debt, which had long become unaffordable. In April, it said it would stop paying its foreign-denominated dues; in May, it officially defaulted. Because Sri Lanka has all but run out of foreign currency, it cannot afford to pay for imports, most crucially fuel, food and medicines. Fuel shortages means doctors cannot get to work, hospitals can barely run ambulances and homegrown food cannot reach cities.
External shocks have played a part in the crisis. But the main culprit, and the main reason for the protesters’ anger, is government mismanagement. An earlier Rajapaksa government led by Mahinda, Gotabaya’s brother, borrowed heavily to finance infrastructure projects, such as a fancy port development, that have yet to generate returns. The most recently disgraced government, led by Gotabaya, slashed taxes, which bashed treasury revenue just before the pandemic halted tourist arrivals. The government also banned fertiliser imports for seven months to save dollars, hitting food production. It then put off going to the IMF until March, hoping that returning tourists and help from China would tide it over.
For months, Sri Lanka and the IMF have been negotiating a bailout and a plan to restructure the country’s debt. A deal is badly needed. But political turmoil has been complicating the process. Lawmakers are expected to elect a new president on July 20th. An all-party interim government should be able to continue negotiations with the IMF. But after months of crisis Sri Lankans are fed up with their politicians. Whoever takes over cannot be sure that they will command public support for painful economic reforms. More turmoil may be on the way. ■
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