Sri Lanka’s economic crisis appears to have finally brought down President Gotabaya Rajapaksa.
Rajapaksa has not commented directly but plans to resign on July 13, the country’s parliament speaker said on Saturday, bowing to intense pressure after a violent day of protests in which protesters stormed the president’s official residence and set fire to fire at the Prime Minister’s house in Colombo.
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Anti-government protesters angry over rolling blackouts, shortages of basic goods and rising prices have long demanded that Rajapaksa step down, but the retired military man has resisted the demands for months, invoking emergency powers in a bid to keep the control.
The violence and political chaos engulfing the island nation of 22 million people comes amid negotiations with the International Monetary Fund (IMF) over a bailout plan, as well as proposals to restructure its sovereign debt, which could unravel. .
Analysts say economic mismanagement by successive governments has weakened Sri Lanka’s public finances, leaving domestic spending outpacing income and output of tradable goods and services at inadequate levels.
The situation was exacerbated by deep tax cuts enacted by the Rajapaksa government shortly after he took office in 2019. Months later, the COVID-19 pandemic hit.
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That wiped out much of Sri Lanka’s income base, notably from the lucrative tourism industry, while remittances from nationals working abroad fell and were further weakened by a sticky exchange rate.
Rating agencies, concerned about the government’s finances and its inability to service large foreign debt, downgraded Sri Lanka’s credit ratings from 2020, ultimately shutting the country out of international financial markets.
To keep the economy afloat, the government leaned heavily on its foreign exchange reserves, eroding them by more than 70% in two years.
The crisis has crippled Sri Lanka, once seen as a model for a developing economy. Fuel shortages have led to long lines at gas stations, as well as frequent blackouts, and hospitals have run out of medicine. Galloping inflation reached 54.6 percent last month and could rise to 70 percent, the central bank said.
What did the government do?
Despite the rapidly deteriorating economic environment, the Rajapaksa government initially called off talks with the IMF.
For months, opposition leaders and some financial pundits urged the government to act, but it held firm, hoping tourism would rebound and remittances would rebound.
Eventually, aware of the scale of the looming crisis, the government sought help from countries like India and China, regional superpowers that have traditionally vied for influence over the strategically located island.
India has provided billions of dollars in loans to help pay for vital supplies. In total, New Delhi says it has provided more than $3.5 billion worth of support this year.
China has intervened less publicly, but said it supports the island nation’s efforts to restructure its debt.
In early 2022, Rajapaksa asked China to restructure payments on around $3.5 billion of debt to Beijing, which in late 2021 also provided Sri Lanka with a $1.5 billion yuan-denominated swap.
Sri Lanka finally opened talks with the IMF.
The toppling of a sitting president by street protests is unprecedented in Sri Lanka’s post-independence history.
However, Rajapaksa’s decision to step down is likely to increase political and economic uncertainty in the country.
Sri Lanka’s constitution dictates that if a president resigns, the country’s prime minister will take office.
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But incumbent Ranil Wickremesinghe has said he too will retire.
Therefore, parliament speaker Mahinda Yapa Abeywardena is likely to temporarily take over the country, until lawmakers elect a new president to complete the remainder of Rajapaksa’s term, which is due to end in 2024, constitutional expert Jayadeva said. Uyangoda.
(Reporting by Devjyot Ghoshal and Alasdair Pal; Editing by Raju Gopalakrishnan)