‘A train wreck in slow motion’: government missteps ignite Sri Lanka street revolt

Rickshaw taxi operator Samantha Ajith waited furiously in a 2km line for petrol in Colombo – now a common sight in Sri Lanka’s largest city, with motorists waiting for hours or even days.

“Government incompetence has caused us major problems. † † They have to leave and let someone else take over,” Ajith said. “They don’t know how to manage the economy.”

Policy slips by the government of President Gotabaya Rajapaksa, exacerbated by shocks caused by Covid-19 and the war in Ukraine, have led to the country’s worst economic crisis in decades and have heightened concerns about the impending collapse of emerging markets. “This has been a train wreck in slow motion,” said an investor who has Sri Lankan debt.

Rising public anger at mounting shortages of food, fuel and other necessities this week sparked a popular uprising.

Tens of thousands of protesters gathered in Colombo on Saturday and crowds poured into the president’s official residence. Rajapaksa has not been seen in public since, and Sri Lanka’s parliament speaker Mahinda Yapa Abeywardena said the president had promised to resign on Wednesday.

Crowds continued to pour in and out of the palace on Tuesday and local reports, citing unnamed government sources, said Rajapaksa was stopped by immigration officials at Colombo airport Monday night while trying to flee to Dubai. His brother Basil, a former finance minister, was prevented to fly out of the country on Tuesday.

Sri Lankans say the emergency happened in plain sight, attributing it to poor choices by their leaders and bad luck.

After Rajapaksa won the 2019 elections, he implemented sweeping tax cuts that cost the state about 800 billion SLR ($2.2 billion) in revenue. The measure has since been reversed. In 2021, the government banned the import of chemical fertilizers in an attempt to boost organic farming – another measure was later withdrawn after a sharp drop in crop yields and disruption to food supplies.

The government also kept the tourism-dependent country closed under a “zero Covid” policy until late last year, even as other countries in the region, such as the Maldives, reopened.

Meanwhile, the shock to world food markets from the war in Ukraine pushed up the price of commodities such as wheat flour and lentils in Sri Lanka, which is heavily dependent on imports. But even as credit rating agencies downgraded Sri Lanka, the government continued to tap capital markets and pile up new debt as its cash reserves ran low.

In May, Sri Lanka defaulted on its foreign debt. At the end of June, foreign reserves totaled $1.8 billion, giving the state wide choices about importing food, fuel and other essentials. With dollars running out, the central bank has printed money to cover costs and inflation is rising to about 50 percent.

Foreign governments and bondholders holding Sri Lanka’s $51 billion debt are taking stock of what some analysts believe will be the first of a series of emerging market collapses this year, sparked by rising energy and food prices and global credit tightening. as a result of the Russian invasion of Ukraine.

“The government doesn’t have enough money to cover spending and doesn’t have the dollar reserves to fund imports,” said Nishan de Mel, executive director of Verité Research, a think tank in Colombo.

Before Saturday’s turmoil, the IMF was at an advanced stage of negotiations for a comprehensive financing facility for Sri Lanka. This would unlock new loans, allowing the country to import supplies and be credible in debt restructuring talks with creditors.

The IMF declined to comment, citing its statement on Sunday saying it is “deeply concerned about the impact of the ongoing economic crisis on people” and that it is continuing technical discussions with the Treasury Department and the central bank.

The country’s shortages now include everything from jet fuel to cooking gas and pharmaceuticals.

As the crisis escalates, an international bailout has become both more urgent and potentially more elusive, analysts say. Any agreement with the IMF must be approved by the fund’s board of directors and a Sri Lankan government willing to implement reforms. The country’s political parties have started talks to form a new government.

Private bondholders, who hold just under half of the country’s debt, have formed a creditors’ committee led by Rothschild and White & Case, which has led negotiations with the government and the IMF. Sri Lanka is represented in creditor talks by Lazard and Clifford Chance, both of whom declined to comment.

Sri Lanka’s largest bilateral creditor is China, from whom it has borrowed much to fund projects, including a seaport and airport. Beijing is taking a tough stance on debt negotiations with Zambia, which some analysts say could raise the bar for any restructuring in Sri Lanka.

“What complicates this is how China behaves,” said Anush Wijesinha, an economist and co-founder of the Center for a Smart Future think tank in Colombo. “Will they voluntarily and voluntarily participate in group discussions? Will they hold out? Do they want more favorable terms?”

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For now, analysts said, rescue calls would await events on the ground. “Politics will outpace the economy for at least next week,” Wijesinha said. “Everything else will remain in the background until this is resolved.”

Meanwhile, as the political discussions continue, people are starving. The UN World Food Program estimates that more than 6 million of Sri Lanka’s 22 million people do not have enough to eat. Due to the feed costs, many poultry farms are closed and fishing boats remain in the harbor because they have no fuel.

“There is no deep sea fishing because there is only a limited amount of diesel and kerosene,” said Nishantha Kumar, a fishmonger in Colombo. “Retail prices for fish have almost doubled.”

Additional reporting by Nikou Asgari in London and Andy Lin in Hong Kong