How a powerful dynasty bankrupted Sri Lanka in 30 months

After Rajapaksa won 2019 elections, a mix of sweeping tax cuts and ill-thought-out policies have eroded nation’s cash reserves.

People standing in line for gas in Sri Lanka
Sri Lanka has run out of cash to pay for essential goods like food and fuel, leading to long petrol lines [File: Jonathan Wijayaratne/Bloomberg]

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

The finance minister at the time, Mangala Samaraweera, called a briefing to assail the “dangerous” pledge to reduce the value-added tax to 8% from 15% and scrap other levies. To him, it was simple math: Sri Lanka collected relatively less revenue than nearly any other country, and its high debt load had forced it to seek cash from the International Monetary Fund.

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

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

After Rajapaksa won the 2019 election, reviving one of Asia’s most powerful dynasties, he passed the tax cut immediately in his first cabinet meeting. He then quickly restored 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 getting voted out in 2015 by a citizenry wary of increased oppression and indebtedness to China.

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

But that strategy quickly backfired. In recent weeks Sri Lanka ran out of cash to pay for essential goods like food and fuel, leading to long petrol lines and daily 13-hour power cuts. Irate citizens burned loaves of bread and ransacked the health ministry to find medicine. Protesters have camped outside the president’s office in downtown Colombo for weeks to demand his resignation.

The Rajapaksa family now is in full damage control mode, racing to ensure basic goods for the citizenry while seeking emergency funds from the IMF, World Bank, China and other lenders. It has stopped paying back foreign debt, defaulting for the first time since achieving independence from the British in 1948. The country’s stock exchange, which had soared after the tax cuts, is the world’s worst performer this year — below even Russia.

What’s more, the Rajapaksas have also been forced to retreat on the two major policies it implemented after the 2019 election. Finance Minister Ali Sabry said the value-added tax must rise for Sri Lanka to shore up its finances, and the Rajapaksas have offered to roll back presidential powers as opponents seek to impeach Gotabaya as president and remove Mahinda as prime minister.

“The Rajapaksas are withdrawing, but that doesn’t mean they’re going to surrender,” said Jehan Perera, a newspaper columnist and the executive director of the National Peace Council of Sri Lanka, an independent advocacy group. “The Rajapaksas are afraid that if they go, they’ll be very vulnerable both in and outside the country. They face human rights violations, accusations of war crimes, and corruption charges.”

For 12 of the last 20 years, members of the Rajapaksa family have controlled the highest reaches of Sri Lanka’s government. Under their watch, critics in the opposition and the media have called Sri Lanka a “soft dictatorship” and described 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 as many as 100,000 people before a cease-fire 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, carved out niches managing ports, agriculture and money. Dozens of relatives hold top posts.

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

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

“There were certain decisions that we did not agree on as a political party when it comes to implementation,” Namal Rajapaksa said by phone, adding that the administration should’ve been more transparent and taken time to educate the public on the challenges. “I don’t blame the public for blaming the Rajapaksa-led government because they are in power. The government is in power, so the government is responsible.”

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

Even before the Rajapaksas took power, the country was in financial trouble. During the family’s first stint in office, the government took out big loans from China to invest in projects like a deep-sea port in its home district of Hambantota on the island’s southern coastline, part of an effort to turn the nation into a South Asian version of Singapore. But many projects stalled and foreign debt more than doubled between 2010 and 2020.

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

“There was this assumption that the way out of the post-Easter Sunday slump was tax cuts and low-interest rates,” said Anushka Wijesinha, an economist and former adviser to the government’s ministry of international trade and development. “It was a mistake.”

Fears of a broader meltdown first emerged with the pandemic, which suddenly sapped revenue from tourism and remittances. Credit rating companies downgraded Sri Lanka. To stay afloat, the government printed money, boosting supply by 42% between December 2019 and August 2021 — helping to stoke what would become Asia’s fastest inflation.

Last April, Sri Lanka suffered another shock: the government abruptly banned chemical fertilizer imports. In public, officials framed the move as delivering on a campaign promise to embrace organic farming and fight the “fertilizer mafia.” In reality, many saw the decision as an attempt to save dollars, according to Wijesinha and other economists. Namal Rajapaksa said the timing of the fertilizer decision was a point of disagreement within the ruling party.

The ban backfired. Sri Lanka’s entire agricultural chain — around a third of the labor force and 8% of gross domestic product — faced disruptions. The paddy harvest failed, forcing the government to import rice and start an expensive food aid program to support devastated farmers. Export earnings from tea, a key revenue source, also dried up. In November, as protests flared, the government partially reversed the ban.

“So many experts came forward and said this is a disastrous policy that will affect food security,” said Dhananath Fernando, the chief operating officer of Advocata, an economic policy research group in Colombo. “But unfortunately, the government was hell-bent on its decision.”

In recent weeks, Sri Lanka ran out of cash to pay for essential goods like food and fuel, leading to long petrol lines and daily 13-hour 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 hit the streets yelling “Go home Gota!” and “Gota is a madman!” The Rajapaksas lost their two-thirds majority in parliament as coalition members defected, and they’re now trying to withstand the opposition’s efforts to remove them from power.

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

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

Source: Bloomberg