- Helping Colombo now will lessen its dependence on China and restore the strategic balance in the Indian Ocean region.
After months of protests, Sri Lanka’s President, Gotabaya Rajapaksha, has resigned from office. Many Sri Lankans blame Rajapaksha and his cronies for the current economic crisis. The country is in the midst of shortages of food, gas, and medicine. The current economic woes are rooted in recent domestic and global developments.
How Did This Happen?
The pandemic and the 2019 terrorist attacks against three churches and three luxury hotels in Colombo have had a large impact. According to the World Bank, tourism accounts for 12% of Sri Lanka’s GDP. The effects of the pandemic were devastating as the economy shrunk by 4%. Additionally, the 2019 ISIS attacks scared off many tourists. Without tourist activity, Sri Lanka’s foreign currency reserves shrunk, and many were left unemployed.
The war in Ukraine only made things worse. Sri Lanka relies heavily on exports for food and oil. The inability to purchase Russian and Ukrainian exports of wheat, oil, and grain increased prices. At the moment inflation for food is at 57%, according to the World Bank. Daily staples such as dal, rice, and fish are three times the original price. People are now having only 2 meals a day.
Domestically, the economic misadventures of Rajapaksha are largely to blame. The shortage of food has to do with the ban on chemical fertilizers. In a push to move towards sustainable farming, the government wanted farmers to move towards organic farming. It expected these changes to be made overnight, but in reality, this plunged the production of essential crops such as rice and wheat.
The government has also accrued severe debt as it borrowed heavily from China to fund large infrastructure projects and from the IMF. In total, Sri Lanka owes over $51 billion to its creditors. While the country was borrowing all this money, the government had a large tax cut aimed at pleasing political allies. This tax cut made it virtually impossible to pay off all loans. The government has now defaulted on its loans.
What Happens Now?
After Rajapaksha’s expected resignation, an interim government will lead the country. But it’s highly unlikely that the new government will have any answers. Inflation of basic goods such as food and gas will continue as the war ravages on in Ukraine. Sri Lanka’s tourism sector will shrink further as tourists will no longer want to visit an economically ravaged country.
For now, Sri Lanka needs to negotiate with its creditors to write off some of the loans. The government does not have enough revenue to pay off a single penny. In addition, the government will not be able borrow money heavily.
The government needs aid to distribute basic resources to its citizens. Sri Lanka needs more exports from the West and China to feed its citizens, otherwise hunger will ravage ordinary citizens.
Economics aside, Sri Lanka’s crisis has geopolitical implications. India and China are fighting for influence in South Asia. China’s involvement in Sri Lankan ports poses a national security threat to India. The development of a naval base in Sri Lanka could allow China to surround India in the South. It is highly likely that China will continue to court Sri Lanka through generous loans.
Given the strategic implications, it is in the QUAD’s (Quadrilateral Security Dialogue — a grouping of Australia, India, Japan, and the United States) best interest to aid Sri Lanka through these tough times. If the QUAD can help rebuild Sri Lanka’s economy, then it’s highly likely that the pendulum will swing in the alliance’s favor. Sri Lanka would reduce its reliance on Chinese loans and shift towards Western institutions. If India can use its influence and help the QUAD rebuild its power base in Sri Lanka, it would be a strategic blow to Chinese expansion.
If the situation is left unresolved, it is highly likely that a humanitarian crisis will ensue further destabilizing the region.
Rohan Kumar is a senior at UC Riverside studying International Affairs. His focus is on Russian foreign policy and South Asian security affairs. He aspires to join the U.S. State Department. In his free time, he watches European soccer (football) and reads the Economist.