The Sri Lankan government, embattled by an unprecedented economic crisis and going through a switch of prime ministers, is struggling to achieve stability. Here is why that is bad news for our country.

How Sri Lanka became a battleground

Protests have rocked Sri Lanka over mismanagement by the Rajapaska dynasty and their party, the SLPP. Last week, prime minister Mahinda Rajapaksa quit after his supporters attacked anti-government protesters, leading to the latter torching the homes of prominent SLPP politicians. His younger brother, president Gotabaya Rajapaksa, has nominated Ranil Wickremesinghe as new prime minister to help ease the political crisis. However, such reshuffles are a traditional tactic in Sri Lankan politics. In October 2018, Wickremesinghe was himself removed as prime minister to make way for Mahinda Rajapaksa before taking back the job briefly in December 2018, before the Rajapaksas returned to power in 2019. Such reshuffles are possible, given how Sri Lanka’s political system is a semi-presidential system, where the president holds much of the real power. 

The ongoing crisis threatens to put an end to the political hold of the Rajapaksa dynasty over Sri Lankan politics that began in 2005 when Mahinda Rajapaksa become president and again in 2010, before briefly losing power between 2015 and 2019 to his former minister Maithripala Sirisena. After 2019, however, the Rajapaksas were back in power; this time with Gotabaya at the helm and Mahinda as prime minister. “It’s a sad story. This is a country with a lot of promise that has become a nightmare because of bad governance, cronyism, nepotism, you name it,” says Mauritius’ former foreign secretary Vijay Makhan, “this was a tragedy that was just waiting to happen.” 

Under the Rajapaksas, Sri Lanka became a battleground for influence between China and India. “The Indian Ocean region as a whole is considered one of the most strategic areas in the world because of the number of trade routes that pass through it,” says Milan Meetarbhan, Mauritius’ former top UN representative, “and within this region, the geographical position of Sri Lanka gives it an outsized importance, more than the size of the country or its economy would otherwise warrant.” The political hold of the Rakapaksas and their SLPP was undergirded by Buddhist Sinhalese nationalism and the fact that it was Mahinda Rajapaksa that crushed the Tamil nationalist insurgency led by the LTTE – who demanded a separate Tamil homeland in the north of the country – in 2009. 

This was also the root of why Sri Lanka soon began looking to China. “It was the civil war with the LTTE that exacerbated the bad blood between Sri Lanka and India,” says Makhan. In 1987, Indian troops intervened in Sri Lanka – wary on the one hand of Sri Lankan action that would inflame Tamil opinion within India while, on the other hand, worried about the emergence of a separate Tamil homeland in Sri Lanka’s north that might encourage similar sentiment in India’s state of Tamil Nadu. “At this point it was not clear whether India was a mediator or had become an actor in the conflict,” says Makhan. 

Given these contradictory motives, New Delhi soon began facing accusations both from Colombo as well as the LTTE that it was backing the other side. Indian troops soon pulled out in 1991, with the intervention leading to the assassination of former Indian Prime Minister Rajiv Gandhi – who ordered the intervention – by an LTTElinked suicide bomber that same year. While India refrained from militarily intervening after that episode, it continued urging Colombo to come to a sort of modus vivendi with the LTTE. But while India diplomatically was urging Colombo to go easy on the LTTE and criticising the fallout of the conflict on the Tamil population in Northern Sri Lanka, China diplomatically backed Colombo during its civil war, providing it with weapons.

Tilt and rebalance

It is the relatively straightforward support that Sri Lanka received from Beijing during the civil war that led to Mahinda Rajapaksa’s tilt towards China during his 2010-2015 stint in power. “There were lots of ups and downs in the bilateral relationship with India, but all this came to a head when the strategic Humbantota port was given to a Chinese company that New Delhi’s eyebrows were raised,” explains Makhan. The port was developed with Chinese help and was handed over to a Chinese firm in 2017 which New Delhi and, subsequently the US, pointed to as evidence of Beijing’s ‘debt trap’ diplomacy. 

However, when the SLPP came back to power, it attempted to rebalance its relations with New Delhi and Beijing. In 2019, it signed an agreement with India and Japan to nominate an Indian company – the Adani Group – to take over a 49 per cent stake over the East Container Terminal at Colombo port. By 2021, that deal fell through, with India accusing Colombo of reneging on the deal while the Sri Lankan side blamed the Adani Group for seeing the deal fall through. The ECT was eventually handed over to a Chinese company, while India was offered a 51 per cent stake in the West Container Terminal in a $700 million deal that same year. 

Then in April this year, the Sri Lankan government cancelled a deal with another Chinese company to develop wind farms just off the Southern coast of India, which India opposed citing security concerns. “Although India has not invested as much as China has, New Delhi realized that it had to pay more attention to Sri Lanka. While Colombo has managed to rebalance the relationship, but there still are tensions simmering just below the surface in its ties with India,” says Makhan. The problem, explains Meetarbhan, “is that historically most of the small states in this region have been non-aligned during the Cold War. This still is a good idea even though the players have changed; what Sri Lanka shows is that getting too dependent on one big power comes at a heavy price.”

The economic roots of the current crisis

The current crisis in Sri Lanka, however, is not about India or China misleading the country, but rather about economic mismanagement by the Sri Lankan government itself. “Sri Lanka was just coming out of very difficult years with the end of the civil war, and just as it seemed to be normalizing, it has been plunged into a fresh challenge,” says Meetarbhan, “the crisis is both political: a perversion of democracy where a single family was holding key positions of power in the country, as well as its economic challenges. All of these have impacted the country. The writing has been on the wall for quite some time now.” 

Sri Lanka’s economic woes come out of its long-standing practice of running a persistent budget deficit and tiding it over by commercially borrowing – not from governments or international lenders – but through what are dubbed International Sovereign Bonds, carrying much higher rates of interest, shorter maturity periods, and higher risk. Borrowing from international commercial markets ballooned from making up a mere 2.5 per cent of Sri Lanka’s foreign debt in 2004, to 56 per cent by 2019. 

By contrast, loans from China only made up 17.2 per cent of Sri Lanka’s external borrowings (at half the rate of interest). By 2021, servicing these commercial borrowings was taking up as much as 95.4 per cent of government revenue and adding pressure on Sri Lanka’s foreign reserves that it had to periodically dip into to service the debt. Take the 2017 Humbantota deal, for example. It was handed over to a Chinese company not in exchange for debt forgiveness from the Chinese, but rather as a short-term measure to get dollars to pay back upcoming debt servicing payments to commercial lenders and to rebalance its foreign reserves. Out of the $4.5 billion in debt service payments that Sri Lanka paid in 2017, only a mere 5 per cent was related to Humbantota. 

Then there were other poor decisions like building an international cricket stadium and an additional airport that was hardly used. As if that was not enough, to keep a campaign promise, Sri Lankan President Gotabaya Rajapaksa in 2019 announced that he would cut VAT down from 15 to 8 per cent. Sri Lanka relied on indirect taxes for 80 per cent of its revenue. Corporate and personal income taxes were also cut, with the lost revenue being estimated at between $500 million to $600 million. 

At the end of 2021, the government was also forced to roll back a ban on chemical fertilizers in the country that it had introduced to force a switch to organic farming, but which ended up decimating crop yields, driving up the price of food and economically hitting Sri Lankan farmers. By the time Covid-19 came around and brought its tourism industry – accounting for 10 per cent of its GDP – to a halt, the collapse became all, but certain. What followed was currency devaluation, runaway inflation, power cuts and long queues for essential commodities. “What the Sri Lankan government has done is not an example for anyone to follow,” posits Makhan. 

Plunged into a crisis, now Sri Lanka is turning to the IMF as well as to India and China to help bail it out. India has been supplying fuel to the country via a $500 million line of credit along with a $1 billion credit line to import essentials like food and medicine, with the Sri Lankan government looking for another $1 billion. China has undertaken a currency swap worth $1.5 billion, a $1.3 billion loan, and further credit facilities. So far, it has pumped $75 million in emergency grants into Sri Lanka. “It’s hard to see how they will reverse this situation without addressing the root causes of what led to this crisis and brought people out on the streets,” insists Makhan.

The Mauritian angle

Relations between Sri Lanka and Mauritius have traditionally tended to be low-key and limited to wider regional causes. In the 1970s, Mauritius gave its backing to Sri Lankan resolutions at the UN to declare the Indian Ocean a zone of peace. Until the 1990s, this remained Mauritius’ official policy in the region. “To start with, Mauritius has always tried to be everybody’s friend,” says Makhan, “we are both in the Commonwealth and both regional states and islands, so when it comes to these, there has been quite a bit of cooperation between Sri Lanka and Mauritius.” 

Direct ties between Mauritius and Sri Lanka have always remained much more modest. Sri Lanka’s dry docking facilities are used to repair and maintain Mauritian ships – the latest being the MV Trochetia in 2021. It was only in 2013 that ties between the two sides really came to the fore when Sri Lanka hosted the Commonwealth Heads of Government meeting. However, a number of different states, including Canada and India, opposed Sri Lanka hosting the meeting over its human rights record and what they said was Colombo’s inability to normalize relations with its own Tamil population. 

That same year, Mauritian prime minister Navin Ramgoolam decided to boycott the summit in Sri Lanka citing the fact that since the end of the civil war in 2009, the Tamil-dominated Northern Province of Sri Lanka was the only one in which elections had not yet been held as well as Sri Lanka’s poor human rights record. It was the first time that a Mauritian prime minister had rebuffed a Commonwealth summit and the first time that a country (Mauritius wanted to host a similar summit in 2015) that was itself looking to host the next summit was boycotting – at least at prime-ministerial level – a previous one. Instead, Mauritius was represented by thenforeign minister Arvin Boolell. “I suppose that Mauritius eventually took the stand that it did with the encouragement of other countries that took a similar stand,” argues Makhan, “since then, relations between Mauritius and Sri Lanka have been in limbo. Neither side has extended any olive branches, and nothing has been done at the bilateral level.” 

It is at the strategic level that the events in Sri Lanka can have an effect on Mauritius. India, looking to counter China in the region, is looking to stitch up security alliances with small island states in the region. So starting in 2011, it came up with what would become the Colombo Security Conclave (CSC) grouping it together with Sri Lanka and Maldives (in Maldives, India helped forestall a coup attempt in 1988). In March this year, Mauritius upended decades of foreign policy by becoming the fourth full member of the CSC, openly aligning itself with New Delhi in a regional security alliance seen as an attempt to counter China in the region. 

The CSC itself has only recently been revived, mothballed until 2018 due to Maldives turning towards China under the Abdullah Yameen government. And Mauritius was kept out of it over Sri Lanka’s anger at Mauritius for boycotting its Commonwealth meet as well as taking positions against it at the UN Human Rights Council over its treatment of its Tamil minority. Maldives is already simmering with protests – recently outlawed by its government – fuelled by the opposition against the presence of the Indian military on Maldivian soil. 

But more seriously for the CSC is that at a time when India wants to prove that the CSC is a credible force – Indian national security advisor Ajit Doval in March said he wanted to see the CSC start working on specific areas such as transnational crime, terrorism, maritime security, humanitarian assistance and cybercrime – Sri Lanka where the CSC itself is officially headquartered (the ‘Colombo’ in the Colombo Security Conclave) seems to be descending into a crisis. “Frequent changes in foreign policy in regional states, where different governments want to make different friends does affect the regional dynamic. Any foreign policy, including that of Mauritius, should be based on a national consensus. In Mauritius’ case this should continue,” insists Meetarbhan. 

“India and China must be watching very carefully at what is happening,” says Makhan, “neither wants to be seen to be propping up an unpopular regime while both have too many interests there to stay out completely.” Regarding the CSC that Mauritius has just officially joined, “this is bound to have repercussions on it; what is happening in Sri Lanka is bound to slow the CSC down with attention focused more on the internal situation in Sri Lanka,” he adds. The last time Sri Lanka went out of control, during its decades-long civil war, in 1988, Maldives almost lost its government to a coup backed by Tamil nationalists (PLOTE, not LTTE). While no one is certain what Sri Lanka will look like after it emerges from this crisis, Mauritius, just as other states in the region, will be watching carefully. “As a general rule, instability in any country will have a ripple effect on its neighbours,” concludes Meetarbhan.