ASIA A Pool Party at the President’s House

A firsthand account and analysis of the Sri Lankan economic collapse

by Madhri Yehiya edited by Ashley Soebroto

In the last several months, Sri Lanka has made headlines for an unprecedented economic crisis that has left the country depleted of its foreign reserves and in massive debt. Millions were left struggling with severe shortages of basic food, medicine, and supplies. Since late 2021, the South Asian island nation has been plagued with hours-long power cuts, increased crime, school closures, and a rise in the black market. Perhaps most significant was the fuel crisis, which forced millions across the country to park in the polima — “line” in Sinhala, the most commonly spoken language — at the gas station for up to weeks, waiting until the government could afford to bring in another oil shipment. 1 After only a few months of returning to in-person school and work following the distribution of COVID-19 vaccines, the lack of guaranteed transportation forced many back online. 2

I landed alone in the commercial capital of Colombo on June 7, 2022. For the next six weeks, I was set to intern at the Migration and Urbanization unit of the Institute of Policy Studies of Sri Lanka, an economics research organization. 3 What was supposed to be a hybrid internship quickly turned into eight hours a day, five days a week spent on a laptop in my grandmother’s house, sometimes working for hours by candlelight during a power outage. In the evenings and weekends, I would visit family, go sightseeing, and walk through the no-longer bustling streets filled with hundreds of “tuk-tuk” taxi drivers who had been parked in line for days. Some would soon die of heat exhaustion or a heart attack. 4 Their distressed faces whizzed by one after the other on the rare occasion that I was lucky enough to find a ride with enough fuel. Figuring out a way back home became a problem to worry about later. My

American accent and clothing meant I was charged increasingly exorbitant fares, but I never bartered for what was practically pennies in U.S. dollars. If and when a bus was available, I was lucky to find a spot to stand without being sandwiched between two other passengers. When I went to extend my business visa past its 30 day expiration date at the Sri Lankan Immigration office, crowds of people, many of them prospective migrant workers, filled the streets outside in line for passport applications and renewals instead. 5 It took longer for me to get through the crowd than to get my own paperwork approved — once inside, I was the only one in line. I later heard a relative of mine had been forced to travel to another city’s branch in hopes of a shorter wait, only to be told that a paper shortage would cause further delay. It was jarring compared to my previous trips to the country each summer before the pandemic. “Sri Lanka has lost its charm,” I said to my aunt one day. “What charm?” she asked. She had waited in line for 18 hours for gas the day prior.

Although Western media mainly latched onto the topic by the height of anti-government protests in July 2022, the groundwork for economic collapse was laid several years ago. The former British colony’s economy is heavily dependent on tourism, an industry that took an enormous hit after the 2019 Easter bombings at multiple hotels and churches by domestic Islamist extremists targeting Christians and Western tourists. 6 In 2021, there were a total of 194,495 tourist arrivals — down from 2,333,796 in 2018, a staggering 92 percent drop likely not caused by the COVID-19 pandemic alone. 7 After a thirty year long civil war primarily between the Sinhalese Buddhist majority and Tamil minority who fought to establish their own state, Amresh Gunasingham of the S. Rajaratnam School of International Studies in Singapore reported that Sri Lankan Muslims became the new target. 8 Combined with a rise in inflammatory government rhetoric, there was a reported increase in hate crimes and anti-Muslim sentiment that following the post-war period of growth, drove down the rate of tourism once again in the years leading up to the pandemic.

Gotabaya Rajapaksa was elected president in November 2019, kickstarting many of the direct political and economic decisions that led to the economy’s crash. The brother of former president Mahinda Rajapaksa — hailed as a hero by some for presiding over the end of the civil war — the younger Rajapaksa won partially on the campaign promise of a widespread tax cut in a bid to raise consumption. 9 His administration proceeded to reduce the Value Added Tax from 15 to 8 percent, the Telecommunications Tariff by 2.5 percent, and completely eliminate a number of other taxes. In practice, government tax revenue decreased from 11.6 to 7.7 percent of the GDP in 2021, a lower ratio than many other countries in the region. 10 The island was left struggling to service its debts and purchase foreign goods and services, and domestic investment failed to adequately increase in the face of mass inflation.

Sri Lanka is also often the textbook example of a developing country involved in several development and infrastructure agreements with China, many of which have seen little financial return domestically. 11 A tragic example of the Belt & Road Initiative's often exploitative impact is the Mattala Rajapaksa International Airport, funded by high-interest loans from the Chinese government. Built in the southern part of the island, the airport is located away from major industrial activity but in the heart of the Rajapaksa family’s hometown and stronghold. In 2016, a Forbes contributor titled it “the world’s emptiest international airport.” 12 Colombo Port City, set to be “South Asia’s premiere residential, retail and business destination” is yet another ambitious project involving Beijing, this time located in Sri Lanka’s commercial capital. An FAQ page online reads that construction was set to finish in 2020. 13 Walking along Galle Face Green, the center of the protests and adjacent to several administrative buildings that were later stormed, the banks of Port City’s ocean wall, still incomplete, had been covered in graffiti. “Gotagogama” was emblazoned on everything from bandanas to the protest art on display in the area — “Gota(baya) go home” in “Singlish,” a commonly used mixture of English and Sinhala. 14

Verité Research, a Colombo-based private think tank, published a critical report in August 2022 on a water supply line project that took place through the 2010s with funding from Chinese loans. 15 Although the goal was to provide clean water pipeline access to 400,000 people while fostering an innovative partnership between the National Water Supply and Drainage Board of Sri Lanka and its Chinese counterpart, the result has been a project mired with construction delays, excessive costs, and poor planning. Verité reported that “several weaknesses in the design of the special framework created loopholes that could be exploited or misused by the parties involved.” 16 NWSDB officials apparently did not do their due diligence when setting the terms and conditions of the loans and construction, allowing for vague language and excessive charges. The result was a contract price 33.4 percent higher than originally estimated and evidence that the project was given the go-ahead before it received support from the Sri Lankan Cabinet. 17 In the end, much of the debt became the responsibility of the government as a whole, and having been delayed seven years now, the water pipeline is still incomplete. Unfortunately, the government’s poor economic foresight does not stop there. In May 2021, chemical fertilizers — used by 90 percent of Sri Lankan farms — were banned without advance warning in an attempt to turn Sri Lanka into an organic agricultural producer. 18 In the words of a report from the Research Institute for European and American Studies, the decision resulted in “economic chaos.” 19 Farmers had inadequate time and support from the government in making the switch to an alternative method. Crops failed and food prices soared, setting the tone for economic mismanagement that would continue to escalate in the following months.

The arrival of the COVID-19 pandemic undoubtedly accelerated an already looming economic crisis. The tourism industry all but shuttered completely for months, and with it came a drop in Sri Lanka’s foreign currency reserves. Tourists bring in euros, U.S. dollars, Chinese yuan, British pounds and more — valuable to a developing country whose currency is not accepted in world markets. The Central Bank of Sri Lanka responded by increasing its printing of the Sri Lankan rupee to an astounding $3.4 billion USD in 2021 with the idea that if the country’s reserves were depleted, simply creating more money could spur consumption and prevent total collapse. 20 The move aligned with the Rajapaksa administration’s support of Modern Monetary Policy Theory, a significant departure from classical views on the negative relationship between inflation and investment. 21 Unsurprisingly, inflation skyrocketed, with the value of the Sri Lankan rupee plummeting to its lowest of all time by May 2022, at Rs. 369.54 per 1 USD. 22 The Journal of Contemporary Issues in Business and Government cited data recording the change in prices for basic goods from March 2019 to March 2022. Rice — consumed by almost all Sri Lankan households — practically doubled in price from Rs. 84.1/kg to Rs. 162.52/kg. Turmeric saw a 443 percent increase, and coconut, native to the island, went up by 81 percent. 23

The deteriorating economy and supply shortage forced an increasing number in the middle class to consider leaving the country as migrant workers, often to the Middle East. 24 This trend is a double-edged sword to the Sri Lankan economy: exchange rate charges on migrant worker remittances are a major source of both income and foreign reserves to the government — but only when sent through the formal channels, such as banks and approved money transfer services. In recent years, however, there has been a steep drop in remittances, one that does not reflect the number of workers sending wages back home. Between 2016 and 2021 there was a 25 percent decrease in the flow of foreign remittances to Sri Lanka. 25 While the repatriation of migrant workers due to the pandemic accounts for part of this drop, if the 2022 rate of remittances reported thus far by the Central Bank continues, the total will be close to a 50 percent decrease compared to each of the previous five years, despite the increase in interest in working abroad. 26 The hawala or undiyal informal money transfer system accounts for this difference, incidentally the focus of recent work by Dr. Bilesha Weeraratne, my internship supervisor at IPS. Rather than losing a certain portion of each paycheck each month, migrant workers have increasingly asked friends, family, the local Sri Lankan shopkeeper — anyone in their trusted circle abroad — to exchange their remittances at either no cost or a better rate. A housekeeper working for a family in Dubai may give her wages to a friend whose brother runs a hardware store in Colombo, who will then charge a lower rate than a bank to give the money to the housekeeper’s son when he stops by the store. While the difference is fairly small to each individual, the total adds up to millions of rupees lost in revenue as well as foreign currency reserves to the government. 27 The increase in the use of informal channels is due in part to the Central Bank’s decision to artificially fix the Sri Lankan rupee’s official exchange rate over time. While trading through the hawala system may yield 350 rupees per 1 USD based on market supply and demand, the formal channels could go no higher than Rs. 202, at least until March of this year. 28 With better rates available, albeit illegally, the policy only increased the popularity of informal channel use. Over time, the Central Bank has had to devalue the rupee to encourage formal remittances and reflect the reality of the foreign exchange market. 29

Although not as widely reported on, a reason for the Rajapaksa administration’s culpability in the economic collapse stems from a recent political debacle regarding Sri Lanka’s Constitution. Shortly after coming to power, Gotabaya Rajapaksa’s administration abolished the 19th amendment, notable for its democratic reforms such as stricter term limits and a balance of powers. It was instead replaced with the 20th amendment, which consolidated executive power in a number of ways. 30 The Centre for Policy Alternatives, an independent think tank based in Colombo, published an accessible guide to the changes in June 2021. Some of the most significant include the president’s ability to remove the Prime Minister at any time, remove or appoint Cabinet members without the PM’s approval, a ban on any court proceedings against a President during their tenure, and the replacement of the Constitutional Council with a Parliamentary Council made of only members of parliament for advisory as opposed to oversight purposes. 31 The 20th amendment has been scrutinized by political and religious groups across the spectrum, and rightly so, as the move came on top of years of allegations against the Rajapaksas regarding nepotism, bribery, and money laundering amounting to millions of rupees — no doubt another reason for Sri Lanka’s drained finances. 32 Indeed, over the last two decades, up to 29 members of the family have held senior positions in government, civil service, business, and the media. 33 As the RIEAS report put it, by the height of the crisis it became clear that the country had turned into “the personal fiefdom of a single-family, the Rajapaksas.” 34

In a move that caught the world’s attention, thousands of protestors of all ages, races, and backgrounds descended upon Colombo on July 9, 2022 to remove the president from office. Military and security personnel stood by and watched as they arrived from across the island on whatever transport possible and marched into Rajapaksa’s official residence, chanting from the imposing walls of government buildings and overrunning the streets outside. Instead of damaging what they found, the protestors tried on his clothes, slept on his bed, lounged on his furniture, and swam in his swimming pool. 35 Aware that they were on the way, the president fled the country, eventually submitting his resignation letter from Singapore days later. 36

The night before the takeover, I received warnings from family members and on social media that travel was not advised and the internet may be taken down by the government to prevent protestors from communicating. I was at dinner with a relative when we learned that a curfew had been imposed. I canceled a short overnight trip I had managed to plan for that weekend and turned on my VPN to avoid losing internet access. I awoke the next morning to the same images as the rest of the world, and around 4 p.m., my uncle spared some gas to drive my little cousin and I into the center of it all.

Thousands of people filled the streets chanting aragalayata jayaweva — “long live the struggle” — in cheer format. Sri Lankan flags were draped like capes around protestors wearing all black. Speeches in Sinhala faster than I could understand were being broadcast on loudspeakers. Traffic moved at 5 miles per hour, marchers surrounding the cars on all sides. The mood was one of jubilant anarchy. People from home texted to ask if I wasn’t safe, if this was a coup, if there was violence on the streets — not at all, I told them. This was retribution. Anger and disappointment toward the government is well-deserved, given that a series of mostly preventable events culminated in the collapse. If Sri Lanka is to dig itself out of this hole once and for all, shortsighted populist policies such as massive tax cuts and the Modern Monetary Policy Theory must be discontinued. Risky and poorly negotiated loans, especially with China, should be avoided, with aid instead coming from India and the West using long payback periods and low interest rates. Indeed, in 2022 alone India has sent tens of thousands of tons of food and fertilizer as well as millions in economic aid, providing a safety net that — for better or for worse — could eventually usurp China. 37 Excise taxes on goods such as tobacco would be a convenient way to raise revenue, while simultaneously decreasing the use of harmful drugs. 38 A greater focus should be placed on domestic production as opposed to import industries in order to avoid worsening supply shortages during an economic downturn or further increasing the deficit. The independence of the Central Bank should not only be respected by the government but asserted by the Central Bank itself who clearly fell victim to political pressure one too many times during this crisis. 39 With enough recovery only then it will be time to reinvest in the tourism industry and focus on predeparture education and incentivization of the use of formal remittance channels for migrant workers.

Given foreign aid and the removal of the president there has been some improvement in recent months, but there is still an enormous amount of reform that remains to be seen. The former prime minister is now president, who has excessively focused on punishing protestors as opposed to addressing their needs. 40 After decades of civil conflict, however, July 9, 2022 held a moment of national unity like no other. At the end of the day, everyone knew someone who had waited in line for hours at a gas station or passport office or hospital only to be disappointed. Maybe my internship wasn’t the international work experience I expected, and maybe I didn’t explore as much of the country as I would have liked — but when I’m asked now what it was like to be in Sri Lanka this summer, I can honestly say that I have few regrets. I got more out of doing an economics research internship in the midst of an economic collapse than I ever could have otherwise. “Don’t do an internship in some paradise,” my dad had told me months before. “You’re an International Relations/ Econ major, go somewhere and see how the world is really suffering.” Still, I recognize that it’s easy for me to have taken away so many positives from my experience — at the end of the day I got to pack my bags and leave. Perhaps the silver lining of the Sri Lankan economic collapse will be the collective realization that gross incompetence is fairly impossible to disguise. From the guards who stood aside to the thousands who marched to the parents who lifted their children waving flags to the youth who organized it all, foundational cracks were placed in the cycle of corruption that is Sri Lanka’s politics — the first step of many to igniting real change.

References

1 “EXPLAINER: What’s happened and what’s next in Sri Lanka,” Associated Press, July 13, 2022, https://apnews.com/article/asia-indiaunited-nations-economy-3f3def44582be83a4bc4e18793f5dc93.

2 “SRI LANKA CRISIS: CHILDREN IN NEED,” Unicef, accessed September 18, 2022, https://www.unicef.org/srilanka/sri-lankacrisis.

3 “Migration & Urbanization,” Institute of Policy Studies of Sri Lanka, https://www.ips.lk/research/migration-development/.

4 Mahadiya Hamza, “Sri Lanka fuel queues claim two new deaths, taking total to 10,” EconomyNext, June 16, 2022, https://economynext. com/sri-lanka-fuel-queues-claim-two-new-deaths-taking-totalto-10-95902/.

5 Associated Press.

6 Sri Lanka Tourism Development Authority, “Major setback & the impact of tourist arrivals,” (2021): 9-10. https://www.sltda.gov. lk/storage/common_media/new%20year%20in%20review%20 Update%2020213611163389.pdf.

7 Central Bank of Sri Lanka, “Statistical Appendix,” Annual Report 2021, https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/ publications/annual_report/2021/en/15_Appendix.pdf.

8 Amresh Gunasingham, “Sri Lanka Attacks: An Analysis of the Aftermath.” Counter Terrorist Trends and Analyses 11, no. 6 (2019): 8–13. https://www.jstor.org/stable/26662255.

9 “The 2019 Tax Cuts: Causes and Consequences | Daily FT,” https://www.ft.lk/opinion/The-2019-tax-cuts-Causes-andconsequences/14-735669.

10 Soumya Bhowmick, “How Sri Lanka’s tax cuts crippled its economy.” Observer Researcher Foundation, August 2022, https:// www.orfonline.org/expert-speak/how-sri-lankas-tax-cuts-crippled-itseconomy/.

11 Maria Abi-Habib, “How China Got Sri Lanka to Cough Up a Port,” The New York Times, June 25, 2018, https://www.nytimes. com/2018/06/25/world/asia/china-sri-lanka-port.html.

12 Wade Shepard, “The Story Behind The World's Emptiest International Airport,” Forbes, May 28, 2016, https://www. forbes.com/sites/wadeshepard/2016/05/28/the-story-behindthe-worlds-emptiest-international-airport-sri-lankas-mattalarajapaksa/?sh=fad62007cea2.

13 “CHEC Port City Colombo (Pvt) Ltd - Sri Lanka,” accessed September 21, 2022, https://www.portcitycolombo.lk/ about/.

14 Janani Vithanage, “GOTAGOGAMA in Sri Lanka: what, where, why, who and how,” Sri Lanka Brief, April 25, 2022, https:// srilankabrief.org/gotagogama-in-sri-lanka-what-where-why-whoand-how/.

15 “The Lure of Chinese Loans: Sri Lanka’s experiment with a special framework to finance its infrastructure investments,” Verité Research, (2022): 18-22, https://www.veriteresearch.org/ wp-content/uploads/2022/08/VR_EN_RR_Aug2022_The-Lure-ofChinese-Loans.pdf.

16 Verité Research, 35.

17 Verité Research.

18 Deepak S. Sharma, “The economic crisis faced by island nation - Sri Lanka: An empirical study,” Journal of Contemporary Issues in Business and Government, Vol. 28, no. 03, (2022): 923, https://www.cibgp.com/ article_18176_9787c3ef8018c40d413c4b98d7afa6e7. pdf.

19 Raagini Sharma, “Sri Lanka Crisis 2022: The Biggest Economic Debacle & Political Turmoil Since 1948,” Research Institute for European and American Studies, (May 2022): 7, https://rieas.gr/ images/editorial/srilanka2.pdf.

20 Neil DeVotta, “The Rajapaksas to blame for Sri Lanka’s disastrous 2021,” East Asia Forum, January 19, 2022, https://www. eastasiaforum.org/2022/01/19/the-rajapaksas-to-blame-for-srilankas-disastrous-2021/.

21 “Sri Lanka Modern Monetary Theory experiment could be an untamed demon: Economist,” EconomyNext, January 10, 2021, https://economynext.com/sri-lanka-modernmonetary-theory-experiment-could-be-an-untamed-demoneconomist-77719/.

22 “USD to LKR Chart,” XE, accessed October 19, 2022, https:// www.xe.com/currencycharts/?from=USD&to=LKR.

23 Deepak S. Sharma, 923.

24 Bilesha Weeraratne, “Repatriation and Replacement of Lost Foreign Jobs: Handling Labour Migration in Sri Lanka during COVID-19,” Talking Economics, Institute of Policy Studies of Sri Lanka, May 14, 2020, https://www.ips.lk/ talkingeconomics/2020/05/14/repatriation-and-replacement-oflost-foreign-jobs-handling-labour-migration-in-sri-lanka-duringcovid-19/.

25 “Flow of Foreign Remittances to Sri Lanka 2015-2022,” Central Bank of Sri Lanka, accessed October 25, 2022, https://www.cbsl. gov.lk/en/workers-remittances/statistics.

26 Ibid.

27 Bilesha Weeraratne, “Black, White and Grey Markets: The Dynamics of Foreign Exchange and Remittances in Sri Lanka,” Talking Economics, Institute of Policy Studies of Sri Lanka, December 17, 2021, https://www. ips.lk/talkingeconomics/2021/12/17/black-white-andgrey-markets-the-dynamics-of-foreign-exchange-andremittances-in-sri-lanka/.

28 Uditha Jayasinghe, “Sri Lanka Devalues Rupee, Seen as Step towards Getting IMF Help,” Reuters, sec. Rates & Bonds, March 8, 2022, https://www.reuters.com/markets/ rates-bonds/sri-lanka-allow-rupee-weaken-230-perdollar-2022-03-07/.

29 Ibid.

30 “Twentieth Amendment to the Constitution,” Parliament of the Democratic Socialist Republic of Sri Lanka, September 22, 2022, https://www.parliament.lk/uploads/ bills/gbills/english/6176.pdf.

31 “A Brief Guide to the 20th Amendment to the Constitution,” Centre for Policy Alternatives, (June 2021): 10-12, https://www.cpalanka.org/wp-content/ uploads/2021/07/A-brief-guide-to-the-20th-Amendment-tothe-Constitution-English-CPA-compressed_compressed-1. pdf.

32 “Sri Lankan ex-president's son accused of moneylaundering,” BBC, August 15, 2016, https://www.bbc.com/ news/world-asia-37089546.

33 “Infographics: Rajapaksa Family And Nepotism,” Colombo Telegraph, March 20, 2013, https://www. colombotelegraph.com/index.php/infographic-rajapaksafamily-and-nepotism/.

34 Raagini Sharma, 6.

35 “After Sri Lanka protesters lounged in the president's pool, what's next for the country's government?” ABC NEWS. July 13, 2022, https://abcnews.go.com/ International/sri-lanka-protesters-lounged-presidents-poolcountrys-government/story?id=86743582.

36 “Sri Lanka political dynasty ends as Rajapaksa quits,” BBC News, July 15, 2022, https://www.bbc.com/news/ world-asia-62160227.

37 Rathindra Kuruwita, “Indian Assistance to Sri Lanka: Lifeline or Chokehold?”, The Diplomat, May 25, 2022, https://thediplomat.com/2022/05/indian-assistance-to-srilanka-lifeline-or-chokehold/.

38 Erandathie Pathiraga, “Taxing Tobacco: Benefits and Burdens of Beedi Taxes to Sri Lanka’s Economy,” Talking Economics, Institute of Policy Studies of Sri Lanka, June 20, 2022, https://www.ips.lk/talkingeconomics/2022/06/20/ taxing-tobacco-benefits-and-burdens-of-beedi-taxes-to-srilankas-economy/.

39 Chandrasena Maliyadde, “Central Bank, Its Independence and Us | Daily FT,” https://www. ft.lk/columns/Central-Bank-its-independence-andus/4-737683.

40 Pasan Jayasinghe, “Why Sri Lanka has a tyrant as president — yet again,” Al Jazeera, October 20, 2022, https://