Gotabaya Rajapaksa, the president of Sri Lanka, has offered his resignation after being forced to evacuate his home in the face of a sizable mob of demonstrators. Sri Lanka is engulfed in a severe political and economic crisis. After months of protracted blackouts, severe food and fuel shortages, and galloping inflation in the country’s most painful economic crisis on record, protesters in the island nation of 22 million people called for the president’s resignation, despite last minute move to secure oil from Russia.
Sri Lankan citizens wake up exhausted from the months-long struggle of rearranging their lives around daily blackouts after the government went bankrupt and essentially ran out of fuel. Disturbing scenes across Sri Lanka has prompted many countries across the globe to urge their citizens to avoid visiting Sri Lanka.
Sri Lanka’s debt-to-GDP ratio increased dramatically from 85% in 2019 to 104% in 2021. In an effort to contain skyrocketing inflation, Colombo formally declared an economic emergency in September 2021. Due to depleted foreign reserves, the crisis had been brewing when the nation froze payment on its external debt in mid-April.
Besides, Sri Lanka failed to pay $78 million in maturing foreign bonds in April 2022 as a result of the worldwide inflationary crisis that began in 2021 and worsened in 2022. Sri Lanka’s Central Bank declared that the nation was in a preemptive default on May 18. Political upheaval resulted from the government’s failure to import food and gasoline, which led to sharp price increases and a decline in its ability to sustain ongoing imports with foreign currency.
There is little doubt that a combination of internal and external forces contributed to Sri Lanka’s growth from a middle-to-high income country in South Asia to where it is today in just a few short years. For many years, Sri Lanka’s government has struggled with recurring budget deficits that have forced it to borrow frequently from both local and international markets, adding to the nation’s public debt. According to the breakdown of Sri Lanka’s foreign debt as of April 2021 is provided by the Sri Lankan Department of Foreign Resources, Sri Lanka’s international borrowing made up of 47% from the capital markets, 13% from the Asian Development Bank, 10% from China, 10% from Japan, 9% from the World Bank, 2% from India, and 9% from others. Sri Lanka’s foreign debt is owed to multilateral financial organizations and commercial creditors from Western nations. They sold the loan to ‘vulture funds,’ who actually took advantage of Sri Lanka’s every cent.
The international capital markets are being controlled by the fiscal regulatory actions taken by the Federal Reserve of US, which proceeds to send further impulses to other notable international capital markets. The manipulation of policies by USA’s Federal Reserve thus structure the financial collapses of smaller economies.
Besides, the COVID-19 pandemic, which has had a severe impact on Sri Lanka’s tourism sector and economy, is one of the main reasons of current economic crisis. The other is the increase in oil and food prices brought by US sanctions due to punish Russia for its conflict with Ukraine.
It is clear that a nation like Sri Lanka, whose economy depends significantly on foreign exchange income, is weak in its capacity to withstand risks associated with the world economy, and the bankruptcy is brought on by a variety of causes. It must be acknowledged that some Western nations, notably the US, are more eager to use the Sri Lankan situation as a geopolitical pawn than they are to actually provide relief to the nation. They look at the unstable Sri Lanka with perverse exhilaration rather than worry.
The Sri Lankan Hambantota Port has become a household name and the primary illustration of “China’s debt trap diplomacy” thanks to the mainstream media in the West and parts of India, think tanks, research institutes, and even many government officials, despite the fact that this has been completely disproven.
With several important external factors, lack of a pro-people, diversified and less foreign depended economic policies, as well as domestic governance inadequacies are ultimately what set off Sri Lanka’s “national bankruptcy” problem. Besides, the US and the West’s portrayal of regional security crisis to interfere in it in order to achieve their global and regional strategic goals for sustaining hegemony have made the development impossible for some countries.
The economic collapse of Sri Lanka puts onus on other South Asian countries like Bangladesh and Pakistan, with the latter in dire economic straits. However, despite rising external debts, Bangladesh is unlikely to enter a calamitous situation like Sri Lanka too soon, if the external debts are handled carefully. According to official data as of June 2021, the composition of total external debt of Bangladesh was 37%, which is dominated by the World Bank (36% of total external debt) and the Asian Development Bank (23% of total external debt), which are concessional. Japan is in third place with 19%, followed by China and Russia (7% each), amongst the sources of Bangladesh’s external debts. The ratio of the country’s external debt to Gross Domestic Product (GDP) increased to 21.8 per cent in 2021, while throughout the same year, Sri Lanka’s external debt to GDP shot to 104%.
Washington’s strategy for these nations coincides with New Delhi’s desire to keep the area from falling under China’s control. As a result, there are now more opportunities than ever for India and the United States to collaborate strategically in this region, which is a key aspect of South Asian geopolitics. It appears that the “Go Home Gota!” demonstrators, who are calling for President Gotabaya Rajapaksa to quit, are not aware of the international dynamics underlying the Sri Lankan issue and driven through a shortcut solution of the economic crisis with regional geopolitics. However, it’s possible that the protests’ local and international stakeholders wish to maintain the status quo for their strategic aim in the Indo-Pacific region for resisting Chinese assertions.