Sri Lanka’s crisis continues amidst intensified political instability

Sri Lanka’s desperate attempts in search of solutions to come out of its present crisis have been prolonged due to latest developments that intensified its political instability following the resignation of President Gotabaya Rajapaksa.

President Rajapaksa on July 09 announced that he would resign from the Office on July 13 after thousands of protesters stormed into the President’s House, Temple Trees--the official residence of the Prime Minister--and the Presidential Secretariat Building facing the Indian Ocean in Colombo on Saturday July 09th.  The protesters who overwhelmed the security forces stormed into these building and continue to occupy them until a new President and a new Government is announced.

The Parliament Speaker is to officially announce the resignation of the President on July 13, paving way for Prime Minister Ranil Wickremesinghe to take office as the interim President until a new President is appointed by the Parliament on July 20. 

Meanwhile, the President has left Sri Lanka and arrived in Maldives in the early hours of Wednesday, July 13, 2022. This was after failed attempts to travel to both the US and India.

The protests are a result of the economic crisis in the country that has led to a dire fuel shortage, forcing the Sri Lankan Government to shut schools and ask employees other than those in essential services to work from home to cut down on consuming the limited stocks. The situation is grave because no entity is willing to supply oil to Sri Lanka even for cash because its petroleum corporation owes a large debt. Sri Lanka, therefore, was compelled to ask for credit support from Russia to import fuel.
The country is trying to secure financial support from multi-lateral agencies, India and China to overcome shortages of fuel, power, food and other essential items.

Outgoing President Rajapaksa had a tele-conversation with Russian President Vladimir Putin on June 6 to help his cash strapped nation import fuel and stated that he “had a very productive discussion”. It comes after Sri Lanka’s Energy Minister warned at the same weekend that the country may soon run out of petrol. The country has already purchased oil from Russia in recent months to bolster fuel supplies during the crisis and has signalled that it is willing to buy more fuel from Russia.

The shortages have pushed inflation to unbearable levels, a record high of 54.6% in June as the cost of food rose by more than 80%. The Central Bank of Sri Lanka raised key interest rates on June 7 by one percentage point to tackle the soaring cost of living in the country. The lending rate was raised to 15.5%, while the deposit rate was increased to 14.5%, the highest in 21 years.

Sri Lanka is perhaps seeking fuel credit from Russia as a last resort. It is struggling to get oil shipments from its usual suppliers in the Gulf or elsewhere due to lack of foreign currency as well as banking and logistical difficulties. Although the western nations have imposed restrictions on Russian oil in response to its invasion of Ukraine, President Gotabaya Rajapaksa took the risk of triggering the displeasure in western capitals. However, the support from western countries is meagre, that makes Sri Lanka vulnerable to seek help from China or Russia, geo-political rivals.

The US announced on June 6, USD 6 million in emergency assistance to Sri Lanka to address the needs of the marginalised and vulnerable communities impacted by the country’s economic crisis. The emergency funding through the US government’s development arm, the US Agency for International Development (USAID), nevertheless, is too small given the depth of Sri Lankan crisis.

Sri Lanka is now thinking to revive its own economy to generate income and employment so as to overcome the economic crisis. It is trying to revive its tourism sector on priority basis, the main foreign exchange earner for the country. For the purpose, Sri Lanka also plans to hold road shows in five Indian cities to attract more tourists. 

Harin Fernando, Tourism Minister of Sri Lanka, who resigned early this week stated recently that “Sri Lanka must have tourism revenue if it is to emerge from this crisis. That is essential”.

India and Sri Lanka have long shared historical and cultural ties. Therefore, Sri Lanka looks up to Indian tourists to boost the tourism sector hit hard by covid-19 related restrictions. Sri Lanka has seen a steady trickle of 61,951 Indian tourists in the first five months of this year, marking the highest tourist footfall from any country. Sri Lanka hopes about one million global tourists this year as against 200,000 arrivals, last year, even though some countries, including United Kingdom have issued advisories asking citizens to undertake only essential travel to Sri Lanka.

Sri Lanka has become option-less because of its economic mismanagement and the impact of pandemic. It is struggling to pay for import of essential goods, including fuel, food and medicine. In May, it defaulted on its debts for the first time in its history after a 30 day grace period to come up with USD 78 million of unpaid debt interest payments expired. The country is currently in negotiations with the International Monetary Fund (IMF) over a USD 3 billion bailout. Sri Lankan government has estimated that the country needs about USD 5 billion from international community including the IMF this year to ward off its economic crisis.

On July 11, Sri Lanka’s Central Bank Governor Dr. P. Nandalal Weerasinghe warned that prolonged political instability in the country may delay progress on negotiations with the IMF for a bailout package.

“Political instability might delay the progress we have been making so far. I would like to have a stable political administration, the sooner the better, for us to make progress, mainly on the programmes we are negotiating with the IMF, bridging finance and also to address shortages of fuel, gas and other things,” Dr. Weerasinghe said during an interview with Reuters. 

He also said the negotiations are ongoing for a USD 1 billion swap with the Reserve Bank of India. Sri Lanka received a USD 400 million swap from India in January and USD 1.5 billion in two credit lines after that.
“We have made a request for another USD 1 billion,” he said, adding the country was also in talks with India for an additional credit line of USD 500 million to import fuel.