How a powerful dynasty bankrupted Sri Lanka in 30 months | Business and Economy News

Ahead of the November 2019 elections, Sri Lankan presidential challenger Gotabaya Rajapaksa proposed sweeping tax cuts so reckless the incumbent government thought it must be a campaign gimmick.

Then finance minister Mangala Samaraweera called a briefing to attack the “dangerous” pledge to cut value added tax from 15% to 8% and scrap other levies. For him, it was a simple calculation: Sri Lanka received relatively less income than almost any other country, and its high indebtedness had forced it to seek money from the International Monetary Fund.

“If these proposals are implemented in this way, not only will the whole country go bankrupt,” the minister warned, “but the whole country will become another Venezuela or another Greece.”

It took about 30 months for his prediction to come true, in what has become a cautionary tale for populist leaders navigating a world of war, disease and high inflation.

After Rajapaksa won the 2019 elections, reviving one of Asia’s most powerful dynasties, he immediately passed the tax cut at his first cabinet meeting. He then swiftly restored the presidential powers held during the 10-year rule of his strongman brother, Mahinda Rajapaksa, a period that saw the family end a nearly three-decade civil war before being elected in 2015 by a distrustful population in the face of increased oppression and indebtedness. in China.

Instead of learning to rule with more humility, Rajapaksa rushed to restore the family’s brand of populist authoritarianism fraught with calls for nationalism among Sinhalese Buddhists, who make up 75% of the population.

But this strategy quickly backfired. In recent weeks, Sri Lanka has run out of money to pay for essentials like food and fuel, leading to long petrol lines and daily 1 p.m. power cuts. Furious citizens burned loaves of bread and ransacked the health ministry for medicine. Protesters camped outside the president’s office in downtown Colombo for weeks demanding his resignation.

The Rajapaksa family is now in full damage control mode, rushing to secure basic goods for citizens while seeking emergency funds from the IMF, World Bank, China and other lenders. It has stopped repaying its foreign debt, defaulting for the first time since gaining independence from the British in 1948. The country’s stock market, which had soared after tax cuts, is the worst performer in the world. world this year – even below Russia.

Moreover, the Rajapaksas have also been forced to retreat on the two main policies they implemented after the 2019 elections. Finance Minister Ali Sabry has said that the value added tax must increase to that Sri Lanka can shore up its finances, and the Rajapaksas have proposed reducing presidential powers as opponents seek to remove Gotabaya as president and remove Mahinda as prime minister.

“The Rajapaksas are pulling out, but that doesn’t mean they’re going to surrender,” said Jehan Perera, columnist and executive director of the Sri Lanka National Peace Council, an independent advocacy group. “The Rajapaksas are afraid that if they leave they will be very vulnerable both inside and outside the country. They face human rights abuses, war crimes charges and corruption charges. »

For 12 of the past 20 years, members of the Rajapaksa family have controlled the highest levels of Sri Lankan government. Under their watch, opposition and media critics have branded Sri Lanka a “soft dictatorship” and portrayed the Rajapaksas as characters like those conjured up by Mario Puzo, who wrote the screenplay for “The Godfather”.

Gotabaya, 72, a former defense chief, led a deadly final push to end the war against Tamil separatists, which killed up to 100,000 people before a ceasefire in 2009. His brother, Mahinda, 76, the family’s political brain, has served as president and twice as prime minister. Two other siblings, Chamal, 79, and Basil, 71, have carved out niches in handling ports, agriculture and money. Dozens of relatives hold positions of responsibility.

Milinda Rajapaksha, a government spokeswoman, declined to comment for this article.

Namal Rajapaksa – the president’s nephew, who recently resigned as sports minister – said that while the government inherited a bad economy from the previous administration, it had also made key policy mistakes and did not had failed to pivot quickly when the pandemic hit. The tax cuts, he said, should have been adjusted after a year because the government was losing revenue and not reaping expected investment from local businesses.

“There were some decisions that we disagreed on as a political party in terms of implementation,” Namal Rajapaksa said by phone, adding that the administration should have been more transparent and take the time to educate the public about the challenges. “I don’t blame the public for blaming the Rajapaksa-led government for being in power. The government is in power, therefore the government is responsible.

“The current situation is purely based on the breakdown of supply chain and governance,” he added. “The president must make decisions, firmly, and govern the country. And also put the institutions back on track.

Even before the Rajapaksas took power, the country was in financial difficulty. During the family’s first term, the government took out large loans from China to invest in projects such as a deep-water port in their home district of Hambantota on the south coast of island, as part of an effort to transform the nation in Southeast Asia. Singapore version. But many projects have stalled and the external debt has more than doubled between 2010 and 2020.

On top of that, the country was still reeling from the Easter Sunday terror attacks in 2019, when Islamic State-linked suicide bombers killed more than 250 people in strikes on churches and luxury hotels. Pervasive fear prompted voters to side with the candidate with experience of crushing insurgencies: Gotabaya Rajapaksa.

“There was this assumption that the solution to the post-Easter Sunday crisis was tax cuts and low interest rates,” said Anushka Wijesinha, an economist and former adviser to the Ministry of International Trade and Development of government. “It was a mistake.”

Fears of a wider collapse first emerged with the pandemic, which suddenly sapped income from tourism and remittances. Credit rating companies downgraded Sri Lanka. To stay afloat, the government printed money, increasing supply by 42% between December 2019 and August 2021, helping fuel what would become Asia’s fastest inflation.

Last April, Sri Lanka suffered another shock: the government abruptly banned imports of chemical fertilizers. Publicly, officials presented the move as the fulfillment of a campaign promise to embrace organic farming and fight the “fertilizer mafia.” In fact, many saw the decision as an attempt to save money, according to Wijesinha and other economists. Namal Rajapaksa said the timing of the fertilizer decision was a sticking point within the ruling party.

The ban backfired. Sri Lanka’s entire agricultural chain – around a third of the workforce and 8% of the gross domestic product – has been disrupted. The paddy crop failed, forcing the government to import rice and launch a costly food aid program to support devastated farmers. Export earnings from tea, a key source of income, have also dried up. In November, as protests erupted, the government partially reversed the ban.

“So many experts have come forward and said this is a disastrous policy that will affect food security,” said Dhananath Fernando, managing director of Advocata, an economic policy research group in Colombo. . “But unfortunately the government was determined to make its decision.”

In recent weeks, Sri Lanka has run out of money to pay for essentials like food and fuel, leading to long petrol lines and daily 1 p.m. power cuts. Photographer: Jonathan Wijayaratne/Bloomberg

The policy mistakes led to shortages of food, electricity and medicine for the poor, and soon prompted angry protesters to take to the streets shouting “Go home, Gota!” and “Gota is crazy!” The Rajapaksas lost their two-thirds majority in parliament following the defection of coalition members, and they are now trying to resist opposition efforts to oust them from power.

While current financial problems make an election difficult to hold at the moment, opinion polls suggest the Rajapaksas would lose in a landslide. The first “Mood of the Nation” poll conducted in January by Verite Research showed that the government’s approval rating was just 10%.

The Rajapaksa government is “testing our level of patience and perseverance”, said Malik Nazahim, 24, who has attended several protests. “That’s what drives us forward. We want change and we want it now.

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