A year since Sri Lanka’s historic debt default initiated its worst economic crisis in over 70 years, the country is now on the road to recovery. In July, the country’s parliament passed an anti-corruption bill to strengthen its national governance in compliance with a $2.9 billion bailout agreement by the International Monetary Fund (IMF). The goal of this legislation is to strengthen Sri Lanka’s national governance to meet the standards of the United Nations Convention Against Corruption (UNCAC).
Following several years of impressive economic growth throughout the 2010s, Sri Lanka defaulted on its foreign debt for the first time in May 2022, sparking the worst economic, political, and human rights crisis in the country in over 70 years. At the height of the crisis, inflation surpassed 50 percent and 4.9 million Sri Lankans—almost a quarter of the population—faced food insecurity.
Fortunately, since securing a $2.9 billion bailout agreement with the International Monetary Fund (IMF) in March, Sri Lanka is now no longer considered a “bankrupt nation.” Necessities such as food, fuel and medicine, which were extremely hard to find for much of 2022, are now more widely available. The public transportation sector, which had shut down due to fuel shortages, is also back up and running. Despite these improvements, however, many Sri Lankan citizens continue to face serious challenges as their government struggles to reconcile over $80 billion in debt.
Sri Lanka’s Devastating Economic Crisis
Although Sri Lanka’s crisis reached a peak in mid-2022, the country had already been facing economic turmoil for several years due to a combination of political corruption, failed economic reforms and the leaders’ decision to delay seeking help from the IMF.
Back in 2019, then-President Gotabaya Rajapaksa initiated deep tax cuts, which proved extremely detrimental to the country’s economy. As a result of the public revenue losses following these cuts, the debt-to-GDP ratio rose from 86.9 percent in 2019 to 105.6 percent in 2021.
When President Rajapaksa banned the use of synthetic fertilizers and pesticides in spring 2021, the situation quickly grew worse. Rice production dropped 20 percent, which forced Sri Lanka to begin importing a crop that it had once grown self-suffiently. The production of tea—the country’s biggest export—fell by almost the same amount, placing an even greater strain on trading relations.
The Sri Lankan government’s rash economic actions also caused its foreign exchange reserves to plummet. Since the island nation relies so heavily on foreign imports, this lack of reserves made it difficult to source essential goods, which drove the price of food, medicine and other necessities far higher than most citizens could afford to pay.
At the time, severe fuel shortages and restrictions forced all non-essential businesses and schools to close in order to save fuel and energy. Public transportation services stopped running and countrywide power cuts became a daily occurrence, making it difficult for people to attend school and work remotely as they had done during the pandemic shutdowns.
“We managed to survive the pandemic, but this is worse,” said Sarath Nanayyakara, a 61-year-old private school bus driver. “If I work for two days, I have to stay in the queue for two more days to fill up the tank.”
Prolonged Shortages Continue
In July 2022, many Sri Lankans celebrated as their corrupt ex-president, Gotabaya Rajapaksa, fled the country. Unfortunately, however, their woes were far from over. Merely days later, the new president, Ranil Wickremesinghe, assumed office and immediately began cracking down on citizen protests.
On 22 July 2022, the government dispatched hundreds of police, army, navy and air force personnel. During the raid, several citizens protestors were beaten, detained and arrested, with some being hospitalized according to Human Rights Watch.
Following the raid, diplomats from several countries and representatives from esteemed human rights protection organizations, including the Human Rights Commission of Sri Lanka, condemned the government’s actions.
“This action sends a dangerous message to the Sri Lankan people that the new government intends to act through brute force rather than the rule of law,” said Meenakshi Ganguly, South Asia director at Human Rights Watch. “Sri Lanka’s international partners should send the message loud and clear that they can’t support an administration that tramples on the rights of its people.”
Since then, the Wickremesinghe administration has worked to meet certain standards set by the IMF as conditions of aid, and the country’s economic situation has begun to improve. Despite these steps forward, however, Sri Lanka’s road to recovery remains long. Changes in economic policy often take time to implement and their impacts are often slow to appear.
Over a year since the crisis reached its peak, 4 million people in Sri Lanka continue to face food insecurity due to the repercussions of the country’s economic catastrophe. “What we find is that with prices of electricity and other utilities having risen hugely, people have [less] money left to buy food,” said Moses Akash, founder of the Voice for Voiceless Foundation that runs several community kitchens in Colombo.
According to a recent survey conducted by Save the Children, a charity that works to “champion the rights of the world’s 2.3 billion children,” roughly half of all Sri Lankan families have had to reduce their children’s food intake, and 27 percent of those surveyed said that adults in the home also skip meals regularly in order to feed their kids.
“Last year, the electricity bill for my house was 180 rupees. Last month it was 680 and this month we got a bill of 1,445 rupees,” said Selvaraj Sadasivam, a 34-year-old farm hand who lives with his sick father, brother, sister, nephews and niece outside Colombo. “Should we eat or spend money on bills?”
Sadasivam explained that it has been over a year since the family has been able to afford three meals a day. According to the World Food Programme, the average Sri Lankan household cannot afford to consume enough animal proteins, dairy or fresh produce, resulting in alarmingly high rates of malnutrition.
Shaping Sri Lanka’s Next Steps
On 20 March 2023, the IMF approved an agreement to aid Sri Lanka under its Extended Fund Facility, which provides financial assistance and long-term support to countries whose weak economic structures have left them in crisis.
The March bailout agreement, which includes nearly $3 billion in aid over a 48-month period, is the 17th arrangement Sri Lanka has made with the IMF since declaring independence. This time, however, the severity of the crisis and fears concerning government corruption have caused the IMF to offer more stringent conditions of aid than in prior agreements.
One of the most notable conditions is that Sri Lanka will be the first Asian country subjected to a “governance diagnostic exercise” to assess the severity of corruption in the nation and ensure that the benefits of the IMF aid will reach the Sri Lankan people. Other important terms include that Sri Lanka must enact new anti-corruption legislation to meet the UNCAC standards, continue making progressive tax reforms, implement a bank recapitalization plan and strengthen financial supervision and crisis management protocols.
Upon receiving the first tranche of $333 million from the IMF, President Wickremesinghe spoke optimistically about the country’s economic recovery. “Sri Lanka is no longer deemed bankrupt by the world,” he claimed in a video statement. “The loan facility serves as an assurance from the international community that Sri Lanka has the capacity to restructure its debt and resume normal transactions.”
Commenting on the initial outline of Sri Lanka’s new Anti-Corruption Bill, Nadishani Perera, Executive Director of Transparency International Sri Lanka, expressed support for many of its provisions, including the creation of a new and more powerful Bribery and Corruption Commission. In the statement, however, Perera also pointed out several potential flaws in the legislation, reflecting that there is still much work to be done when it comes to protecting citizens’ rights.
Krishna Srinivasan, director of the Asia and Pacific Department of the IMF, spoke with similar approval of Sri Lanka’s steps to implement the changes required by the aid agreement. Like Perera, however, he noted that these steps were only the beginning. “The IMF supported program is an opportunity for all Sri Lankans to come together to work through this crisis to restore economic stability and put the country on a sustainable growth path. The key is implementation,” he stated.
Article by Fatima Abuzar.
Editing by Anrike Visser.
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