• The Sri Lankan economy is suffering from the worst economic crisis in its history which can be mainly attributed to the long running economic mismanagement by successive governments that created and sustained a twin deficit (budget shortfall alongside a current account deficit).
• “Sri Lanka is a classic twin deficits economy,” said a 2019 Asian Development Bank working paper.
• “Twin deficits signal that a country’s national expenditure exceeds its national income, and that its production of tradable goods and services is inadequate.”
• With the country’s lucrative tourism industry and foreign workers’ remittances sapped by the pandemic, credit ratings agencies moved to downgrade Sri Lanka and effectively locked it out of international capital markets.
• Then, Sri Lanka’s debt management programme, which depended on accessing those markets, derailed and foreign exchange reserves plummeted by almost 70 per cent in two years.
• Another fatal mistake was made in April 2021 when the Rajapaksa government decided to ban all chemical fertilisers. In order to prevent the drain of foreign exchange reserves, all fertiliser imports were completely banned. Sri Lanka was declared a 100% organic farming nation.
• This policy was reversed in November 2021, which hit the country’s farm sector pretty hard as drastic fall in agricultural production was observed and more imports became necessary.
• The country also began exporting garments, and earning foreign exchange from tourism and remittances (money sent into Sri Lanka from abroad, perhaps by family members).
• Any decline in exports would come as an economic shock, and put foreign exchange reserves under strain.
• Because of this Sri Lanka frequently encountered balance of payments crises.
• From 1965 onwards, it obtained 16 loans from the International Monetary Fund (IMF).
• Each of these loans came with conditions including that once Sri Lanka received the loan they had to reduce their budget deficit, maintain a tight monetary policy, cut government subsidies for food for the people of Sri Lanka, and depreciate the currency.
• But usually in periods of economic downturns, good fiscal policy dictates governments should spend more to inject stimulus into the economy.
• This becomes impossible with the IMF conditions. Despite this situation, the IMF loans kept coming, and a beleaguered economy soaked up more and more debt.
• The last IMF loan to Sri Lanka was in 2016. The country received US$1.5 billion for three years from 2016 to 2019.
• The conditions were familiar, and the economy’s health nosedived over this period. Growth, investments, savings and revenues fell, while the debt burden rose.
• A previous Rajapaksa government headed by Mahinda, Gotabaya’s brother, borrowed heavily to finance infrastructure projects that have yet to generate returns.
• An already bad situation turned worse in 2019 there was a series of bomb blasts in churches and luxury hotels in Colombo which led to a decline in tourist arrivals, reports stated a 80% decline.
• While deep tax cuts were promised by Rajapaksa during a 2019 election campaign that were enacted months before the COVID-19 pandemic, which bashed the governments revenue.
• A bad situation turned worse with two economic shocks in 2019.
• First, there was a series of bomb blasts in churches and luxury hotels in Colombo in April 2019.
• The blasts led to a steep decline in tourist arrivals – with some reports stating up to an 80% drop and drained foreign exchange reserves.
• Second, the new government under President Gotabaya Rajapaksa irrationally cut taxes VAT (Value-added tax) were cut from 15% to 8%.
• Other indirect taxes such as the nation building tax, the pay-as-you-earn tax and economic service charges were abolished.
• Corporate tax rates were reduced from 28% to 24%. About 2% of the gross domestic product was lost in revenues.
• But foreign exchange reserves remained under strain.
• A fall in the productivity of tea and rubber due to the ban on fertiliser also led to lower export incomes.
• Due to lower export incomes, there was less money available to import food and food shortages arose.
• The last IMF loan to Sri Lanka was in 2016.
• The country received US$1.5 billion for three years from 2016 to 2019.
• But currently the government delayed going to the IMF until March, hoping that returning tourists and help from China would tide it over.
• But just as tourism began to recover, Russia’s invasion of Ukraine pushed up commodity prices yet again, making imported fuel and food much more expensive.

• The first Emergency imposed in Sri Lanka was in 1958 after Sri Lanka embraced the Sinhala Only language policy, and off and on from 1971 onward, when the left-wing Janatha Vimukthi Peramuna mounted its first insurrection.
• The power to declare a state of Emergency is vested in the President, who is the head of government, under Article 155 of the Constitution.
• The 1947 Public Security Ordinance (PSO) provides the legal framework for the proclamation of Emergency.
• Under the ordinance, a state of Emergency can be proclaimed “where, in view of the existence or imminence of a state of public Emergency, the President is of opinion that it is expedient so to do in the interests of public security and the preservation of public order or for the maintenance of supplies and services essential to the life of the community…”.
• The PSO empowers the President to frame Emergency regulations for detention, taking possession of property or undertaking; authorisation to enter and search any premises; for amending any law, suspending the operation of any law, and for applying any law with or without modification, without reference to Parliament. The regulations can override all existing laws.
• The Emergency (Miscellaneous Provisions and Powers) Regulations (EMPPR), give special powers of search, arrest, and detention to the national security forces and law enforcement agencies.
• Emergency regulations are valid for a month, but the President must seek ratification for the proclamation or extension beyond a month, every 14 days.
• The Emergency lapses if it is not brought before Parliament.
• President Maithripala Sirisena had declared an Emergency in March 2018 to contain anti-Muslim violence in some parts of the country that led to the deaths of two people, acts of arson, and damage to property.
• And before that, Sri Lanka was under a near continuous state of Emergency for 27 years from the anti-Tamil riots of July 1983 to August 2011 with brief respites in 1989 and 2001.

• As Sri Lanka faces this severe economic crisis many people believe that the current situation is because of Sri Lanka’s economic relationship with China citing it as China’s debt-trap diplomacy.
• Debt-trap diplomacy is a term in international finance which describes a creditor country or institution extending debt to a borrowing nation partially, or solely, to increase the lender's political leverage.
• The term was coined by Indian academic Brahma Chellaney.
• As China accounts for nearly 10 percent of Sri Lanka’s total foreign debt in the form of concessionary loans, though additional commercial loans through Chinese state banks have also been procured by Sri Lanka.
• Because of its bad financial situation, Sri Lanka had to hand over control of the Hambantota port constructed in the southern part of the country to China for 99 years as part of the loan repayment process.
• The port was constructed using Chinese money this further pushes the narrative that Sri Lanka suffered at the hands of China’s debt-trap policy.

Who is Gotabaya Rajapaksa?

• Lieutenant Colonel Nandasena Gotabaya Rajapaksa born 20 June 1949 is a Sri Lankan politician and former military officer currently serving as the 8th President of Sri Lanka since 2019.
• He has previously served as Secretary to the Ministry of Defence and Urban Development from 2005 to 2015 under the administration of his elder brother former President Mahinda Rajapaksa, leading the Sri Lankan Armed Forces to the military defeat of the Tamil Tigers.
• Rajapaksa was educated at Ananda College, Colombo and joined the Sri Lankan Army in April 1971.
• Following basic training at the Army Training Centre, Diyatalawa, he was commissioned as signals officer and later transferred to several infantry regiments.
• He took early retirement from the army and moved into the field of information technology, before immigrating to the United States in 1998.
• He returned to Sri Lanka in 2005, to assist his brother in his presidential campaign and was appointed Defence Secretary in his brother's administration.
• During his tenure the Sri Lankan Armed Forces successfully concluded the Sri Lankan Civil War defeating the Tamil Tigers and killing its leader Velupillai Prabhakaran in 2009.
• He stepped down following the defeat of his brother in the 2015 Presidential election.
• In 2018, he emerged as a possible candidate for the 2019 presidential election, which he successfully contested on a pro-nationalistic, economic development and national security platform.
• He is the first person with military background to be elected as President of Sri Lanka and also the first person to be elected president who had not held an elected office prior.

• Rajapaksa’s administration and the Central Bank of Sri Lanka (CBSL) resisted calls by experts and opposition leaders repeatedly over the months to seek help from the IMF despite rising risks.
• But after oil prices soared in the wake of Russia’s invasion of Ukraine in late February, the government eventually drew up a plan to approach the IMF in April.
• An IMF spokesman has said that discussions with Sri Lankan authorities with regards to a possible loan program will take place in “coming days”.
• Sri Lanka steeply devalued its currency before going to the IMF, further stoking inflation.
• Rajapaksa has also sought help from China and India, particularly assistance on fuel from the latter.
• A diesel shipment under a $500 million credit line signed with India in February is expected to arrive on Saturday.
• Sri Lanka and India have signed a $1 billion credit line for importing essentials, including food and medicine, and the Rajapaksa government has sought at least another $1 billion from New Delhi.
• After providing the CBSL with a $1.5 billion swap and a $1.3 billion syndicated loan to the government, China is considering offering the island nation a $1.5 billion credit facility and a separate loan of up to $1 billion.