Sri Lanka in Crisis

Sri Lanka in Crisis

INSIGHTi

Sri Lanka in Crisis
July 11, 2022
Sri Lanka is in the midst of an economic and political crisis that may have far-reaching ramifications for
the country’s political development and regional relations. Flawed agricultural policies (see below), a tax
cut, limited foreign exchange, declines in remittances and tourism, and the increasing costs of food and
fuel in part due to the war in the Ukraine all arguably contributed to the current crisis. Mass
demonstrations protesting the government’s inability to alleviate food, fuel, and medicine shortages and
address power cuts culminated in protesters storming the presidential palace and the prime minister’s
residence on July 9th. President Gotabaya Rajapaksa fled to Male’, Maldives, and then Singapore, and
formally resigned on July 15. There are reports the U.S. Government rejected Gotabaya’s recent visa
request. The Parliament announced it would convene on July 16 and select a new president within a week.
Prime Minister Ranil Wickremesinghe, now also acting president, announced a state of emergency and
imposed a curfew in the country’s western province, including Colombo, following Gotabaya’s departure.
Wickremesinghe has stated he will resign once a new government is in place.
The Economic Crisis
Sri Lanka defaulted on its debts for the first time in May 2022, and the government informed creditors it
would not make payments until it was able to restructure its debt. Sri Lanka reportedly owes $51 billion,
with $7 billion due in 2022. Sri Lanka’s largest external creditors are the Asian Development Bank
(13%), Japan (10%), China (10%), and the World Bank (9%). Some analysts forecast that Sri Lanka’s
economy will contract by more than 6% in 2022, while the World Food Program estimates that over 22%
of the population are food insecure. Inflation reached a year-on-year record of over 50% in June 2022.
Rajapaksa had banned imports of synthetic agrochemicals, including chemical fertilizers and pesticides,
as part of a policy to move Sri Lanka to organic agriculture without a transition period. This, and fuel
shortages, led to an estimated decrease in agricultural yields of 20% and 70% for the growing season
ending in March 2022. Remittances from overseas workers have declined to less than half of 2019 levels,
and tourism is down due to the COVID-19 pandemic. Media reports suggest some Sri Lankans,
particularly ethnic Tamils, are fleeing the country for destinations such as India and Australia, raising the
prospect of a new refugee crisis.
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Political Crisis
President Rajapaksa and his brother, former President Mahinda Rajapaksa, had been popular with the
Sinhalese-Buddhist majority for their victory over the Liberation Tigers of Tamil Ealam. Human rights
and democracy advocates criticized the Rajapaksas for nepotism, failure to pursue national reconciliation
after the civil war, and a security-focused approach to the Tamil community. Other observers viewed
Mahinda Rajapaksa as having tilted Sri Lanka towards China during his administration (2005-2015).
Efforts by Gotabaya Rajapaksa to stem the current crisis failed, and in April Members of the Cabinet
resigned, followed by Prime Minster Mahinda Rajapaksa in May. New Prime Minister Wickremesinghe
became acting president on July 13th.
Prospects for a Bailout
The International Monetary Fund (IMF) reportedly is hoping for a resolution of Sri Lanka’s political
turmoil so that talks on a bailout package can resume with the new government. Sri Lanka’s foreign
exchange reserves fell to a record low of $1.92 billion at the end of May 2022. In December 2021, the
Rajapaksa government reached a $1.5 billion currency swap arrangement with China, but Sri Lanka
cannot use the facility because China requires it to have foreign reserves equivalent to three months of
imports to do so, potentially complicating talks with the IMF. India has reportedly provided $4 billion in
credit and loans to help Sri Lanka carry on until it can negotiate an IMF bailout package.
Issues for Congress
A humanitarian crisis in Sri Lanka could impact the broader region, including through refugee flows. The
United States, some other countries, and multilateral organizations are trying to avert such an outcome by
providing assistance. India has moved quickly to address the situation, and issued a statement asserting
that Sri Lanka is at the center of its “Neighborhood First” policy. Addressing the crisis may offer
opportunities for “Quad” members—Australia, India, Japan, and the United States—to cooperate.
The Biden Administration announced $12 million in food assistance for Sri Lanka on June 21, 2022, and
Congress may consider additional measures. A June 25 posting by the U.S. Embassy in Colombo reported
that “the U.S. has announced $120 million in new financing for Sri Lankan small and medium-sized
businesses, a $27 million contribution to Sri Lanka’s dairy industry and $5.75 million in humanitarian
assistance [and] ... committed $6 million in new grants to provide livelihood assistance to vulnerable
populations.” On June 28, President Biden announced $20 million in additional assistance to strengthen
food security in Sri Lanka. The crisis may lead Sri Lanka to overcome its reluctance to take other forms
of U.S. assistance; President Rajapaksa in 2020 had rejected a proposed $480 million Millennium
Challenge Compact. The Sri Lankan government has sought to renegotiate the terms of its currency swap
agreement with China and receive additional loans, but Beijing has not yet responded.
A new government in Colombo may offer an opportunity to address human rights issues. The Rajapaksas
had focused on perceived threats emanating from Tamil and Muslim minorities, and had stepped back
from local and international efforts, including at the U.N., to address inequities and human rights abuses
stemming from the civil war. Congress currently conditions U.S. assistance to Sri Lanka on the
government taking meaningful steps on a number of issues, including human rights and governance, and
may consider structuring new assistance in a way that would contribute to reconciliation efforts.

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Author Information

Bruce Vaughn

Specialist in Asian Affairs

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