Sri Lanka has been hit by an unprecedented financial crisis in 2022, which has also caused political upheaval in the island nation, leading to the ousting of the all-powerful Rajapaksa family for the time being. The resignations of President Gotabaya Rajapaksa in July and his older brother Prime Minister Mahinda Rajapaksa in May amid massive anti-government protests have subsided with the formation of a government led by their ally Ranil Wickremesingh, which is now tasked with stabilizing the economy and restoring the financial situation. the health of the economy, already hard hit by the pandemic.
Chaos reigned in the island nation from April to July, with kilometer-long queues forming at gas stations and thousands of people angrily turning out to block roads with empty cooking bottles. More than 20 people have died in snaking queues for fuel due to exhaustion in long queues and in some cases waiting times exceeding 72 hours.
In April, President Gotabaya Rajapaksa fired his brother and Finance Minister Basil Rajapaksa as the country began to feel the heat of a looming economic upheaval. In May, the Sri Lankan government defaulted on more than US$51 billion in foreign loans – the first time in the country’s history. Extending a much-needed lifeline to a neighbor in need, India provided nearly $4 billion in financial aid to Colombo during the year.
In January, India announced a US$900 million loan to Sri Lanka to build up its depleted foreign reserves as a financial crisis began to unfold. It later offered Sri Lanka a US$500 million line of credit to finance the country’s fuel purchases. The line of credit was later extended to $700 million due to the sheer gravity of the situation. Chronic shortages of foreign currency and soaring inflation have led to severe shortages of medicine, fuel and other essentials.
The debt default came as public protests raged in April over the government of then-President Gotabaya Rajapaksa’s mishandling of the country’s economic crisis, the worst since independence in 1948. Hundreds of thousands of people from all walks of life and all communities took part in largely peaceful protests demanding the resignation of President Rajapaksa and his older brother Mahinda Rajapaksa, the then prime minister who quit in May.
External Affairs Minister S Jaishankar was the first foreign dignitary to visit the island amid the unprecedented chaos. “Sri Lanka is our closest neighbour. It is our pleasure to extend our goodwill to help you people,” Jaishankar said in March. India has also requested the International Monetary Fund (IMF) to urgently provide financial assistance to Sri Lanka.
Gotabaya Rajapaksa’s government has been under scrutiny for ignoring the option of going to the IMF when the nation’s pandemic-hit economy appeared to need help. Sri Lanka’s economy has “totally collapsed”, Prime Minister Wickremesinghe declared in June. In June, India sent four senior government officials to Colombo to assess the country’s economic crisis Wickemesinghe told Parliament.
President Wickremesinghe recently said India and Sri Lanka had “successful” talks on debt restructuring, and the country will also open talks with China as it seeks assurances from major bilateral creditors to strike a key IMF deal. He will have tough decisions to make, but the Sri Lankans are not on his side. They accuse him of rescuing the Rajapaksa, who caused economic misery through mismanagement and corruption.
