India’s Lessons From Sri Lanka: Economic Wokeism And Dynastic Rule Lead To Ruin

The Rajapaksas are on the run. Over the weekend, protesters stormed the President’s House in Colombo, taking over the swimming pool and bedrooms amongst other corners of the place. Tensions have been brewing in the island nation for a few months now, given the soaring inflation touching 50 per cent and the lack of oil and other necessary commodities for the civilians.

While President Gotabaya Rajapaksa’s official residence was stormed and turned into a picnic spot by the protesters, the house of Prime Minister Ranil Wickremesinghe, who has resigned to make way for an all-party government, was set on fire. Sri Lanka’s mounting debt, both national and international, is a result of a political cocktail ushered through dynastic narcissism and economic foolishness.

Gotabaya Rajapaksa, taking over in November 2019, became the first former military man to become the President of Sri Lanka. Taking a cue from the constitutional crisis that started in 2018, Gotabaya began the process to renounce his United States citizenship in March 2019. Less than a week after the Easter Sunday bombings in the country, Gotabaya announced his campaign for President.

A little more than half a year later, in August 2020, elections to the parliament of Sri Lanka, a legislature with 225 members, were held. Mahinda Rajapaksa’s coalition won a landslide victory, claiming 140-odd seats and he returned as the Prime Minister after serving as President for ten years between 2005 and 2015 and as the Prime Minister between 2004 and 2005 and for a couple of months in 2018. On May 22, Mahinda Rajapaksa resigned.

The Rajapaksa family has played a decisive role in the politics of Sri Lanka for decades now, starting with Don Alwin Rajapaksa, father of the current President, who started out as a parliamentarian after the country’s independence in 1948. In the last two decades, the family furthered its grip on the politics of the island nation. Between 2010 and 2015, during the second term of then-President Mahinda Rajapaksa, as many as forty members were in several government positions apart from the cabinet.

Thus, back in 2013, Mahinda Rajapaksa as the President, Gotabaya Rajapaksa as the Defence Secretary of Sri Lanka, and Basil Rajapaksa as the Minister of Economic Development controlled five large ministries within the government, with extended family members elsewhere, having access to anywhere from 45 per cent to 70 per cent of the country’s budget.

One of the first moves of the new parliament elected in 2020 and controlled by the Rajapaksas was the twentieth amendment to the constitution. The amendment, reversing the system of checks and balances ushered by the previous regime, gave a free pass to the President to dissolve the Parliament after one year and appoint any person, without notifying or gaining consent from the Parliament, to the government offices. Put simply, it was a free pass to install members of the Rajapaksa family anywhere in the government, as was the norm between 2005 and 2015.

The hold of the Rajapaksa family on Sri Lanka’s political and economic system had its consequences. There was a conspicuous closeness to China that resulted in the inauguration of the Hambantota port in 2011 amongst other infrastructure projects. In 2014, a Chinese submarine was seen in Colombo port, adding to the woes of India and further pushing the island economy closer to China’s Belt and Road initiative.

Mahinda Rajapaksa’s children, starting with his Namal Rajapaksa, an MP from Hambantota, served as a Minister for Youth and Sports and was investigated for money laundering. Basil Rajapaksa, who served as the finance minister until the cabinet’s resignation, was also investigated for corruption and was infamously known as ‘Mr 10 per cent’ for the commissions he allegedly demanded on government contracts.

Chamal Rajapaksa, another of Mahinda and Gotabaya’s siblings, had portfolios for water management and water development. During Mahinda’s Presidency, he facilitated the deal between Sri Lankan Airlines and Airbus. One of his wards was the director for Sri Lankan airlines, a state-backed telecom company, and held numerous private secretarial positions.

Chandra Rajapaksa, another sibling, was a private secretary in key ministries. Preethi Rajapaksa, another sibling, was one of the members of the Security and the Exchange Commission, Insurance Board, chair of Sri Lanka ports authority, and several other bodies. Put simply, the Rajapaksa clan was running the country.

The trail of corruption was visible in the extended family as well. In April 2022, Jaliya Wickramsuriya, one of the cousins of the Rajapaksas and the former ambassador to the United States, pleaded guilty to a financial fraud case. Nirupama Rajapaksa, the niece of Gotabaya Rajapaksa and one of the deputy ministers in the government, along with her husband, was caught using shell companies and trusts to evade as much as $18 million in taxes. The couple, however, refuted the allegations.

The dynastic narcissism had a direct bearing on the economy as well. The signs of economic collapse were visible in early 2021 itself when international agencies began citing the government’s weak fiscal situation as a reason for downgrading them. S&P Global Ratings downgraded Sri Lanka's long-term sovereign credit ratings to CCC+/C from B-/B, stating that the pandemic had ravaged the island nation’s revenues and therefore, servicing the debt would be an issue.

Across the 1990s, Sri Lanka’s foreign debt was made up of concessionary loans, sourced from the likes of the World Bank, and Asian Development Bank, and they came with a long payback period and low-interest rates, giving the government a strong cushion for repayment. Thus, at that point, the foreign debt, payable after 20 years, minimum, was not at all a threat to the servicing capacity of Sri Lanka.

However, as is the case with all free lunches, the concessionary loan spree also came to an end in the 2000s and the country had to move towards commercial borrowings with a significantly higher rate of interest, and without the ease of payback. This is where the problem began.

As per the data of Sri Lanka’s Central Bank, in 2004, commercial borrowings made up less than 5 per cent of the total foreign debt with over 95 per cent of foreign debt in concessionary loans. By 2010, commercial borrowings were close to 40 per cent of Sri Lanka’s foreign debt, and by 2019, more than 55 per cent. The ten years of Mahinda Rajapaksa’s presidency put the country on the path to economic ruin.

Sri Lanka’s own economic ‘wokeism’ has also added to its woes. In April 2021, the Sri Lankan government banned the import and usage of synthetic fertilisers and decided to go organic. For an island nation, dependent on agri-exports, and with more than 60 per cent population directly or indirectly dependent on farming, the move was economically suicidal. Chamal Rajapaksa, the Minister of Irrigation, was apparently leading the fight against the ‘fertiliser mafia’.

Thus, Sri Lanka, had to now worry about food security, was importing rice, and was unable to export as much tea as it was doing before. The yield (tonnes/hectare) fell from 4.85 in 2019-20 to 4.57 in 2020-21 to 3.91 in 2021-22. The production came down to 2.92 million tonnes in 2021-22 from 3.39 million tonnes the previous year. The imports increased more than four times, from 147 thousand tonnes in 2020-21 to 650 thousand tonnes in 2021-22. The rice import for 2021-22 was more than that between 2017-2021 combined. Hail Organic!

Sri Lanka, much to the dismay of many Twitter economists in India, also went on a money printing spree and had to witness the music slowing down. The premise behind printing more currency was to increase the share of the domestic debt against foreign debt, which the Central Bank head believed would not be a cause of concern. Thus, between December 2019 and August 2021, the money supply increased by 2.8 trillion Sri Lankan rupees, a whopping 42 per cent. Today, the island nation battles with consequent inflation, as high as 40 per cent, even for the most essential commodities.

The 'wokenomics' history does not stop there, for the Rajapaksa government, after taking over in 2019, went on tax cuts, reducing the value-added tax to 8 per cent from 15 per cent, and doing away with the 2 per cent tax on domestic goods and services. Compared to 2019, there was a 30-odd per cent decrease in tax income for the government. The pandemic in 2020 was the final nail in the coffin. Tax revenue as per cent of the GDP has fallen to 8-odd per cent, the lowest in two decades. The lack of funds to pay for oil imports has resulted in power cuts that range from four to twelve hours each day.

To sum up, in 2019, economic wokeism took over as the state disrupted the agricultural sector, slashed taxes, and went on a printing spree. The pandemic contracted the economy in 2020 and 2021, as tourism was hit, and in 2022, with the crude oil prices hitting the roof, the cycle of economic doom was complete. The Rajapaksa clan, playing the dynasty card and infiltrating all levels of the government thus ushering in corruption and hindering reforms, further accelerated the doom.

Today, the island nation is renegotiating debt with its creditors, hoping for a generous credit extension from India apart from the aid already underway, and discussing a bailout with the International Monetary Fund (IMF). For certain states in India, the lessons are clear. Economic short-sightedness coupled with the dynastic rule leads to nothing but total ruin.