It is hard to imagine a country facing a more calamitous set of circumstances than Sri Lanka. The country has, essentially, run out of money.
It can no longer pay for imports of fuel, food and medicines. With prices soaring, a humanitarian catastrophe looms.
This month, the former president, Gotabaya Rajapaksa, fled to the Maldives and resigned. The capital, Colombo, has ground to a halt, with a curfew imposed. The latest president, Ranil Wickremesinghe, has declared a State of Emergency. The Sri Lankan rupee has lost 80% against the US dollar this year.
For those who visited the country in its tourist heyday of the 2000s to enjoy its luxury hotels, flawless beaches and beautiful rolling landscapes, it must sound surreal.
“We are a country with so many resources, so much potential. But the mismanagement and corruption here have stolen it all from us,” says Sri Lankan activist Bhavani Fonseka.
The four critical factors behind the decline and fall of Sri Lanka will not sound unfamiliar to residents of other emerging markets, including South Africa.
First and fundamentally, it is a story of gross financial mismanagement and corruption. The government debt-to-GDP ratio has spiralled from 68% to more than 100% in the past 10 years. It has continued to run budget deficits of more than 10% over the past two years.
Even worse is where these resources have been spent. Instead of allocating debt to projects that would increase productivity, such as education or infrastructure, it was disbursed in the form of social grants and lavish subsidies on fuel.
Second, according to Shanta Devarajan, director for development economics at the World Bank, the country is burdened with a number of broke, dysfunctional and expensive state-owned enterprises. SriLankan Airlines is emblematic, having been kept alive on a series of taxpayer-funded bailouts for years. The airline has not made a profit since 2008.
Third, decades of corruption have plagued Sri Lanka. Since 2005, the Rajapaksas have dominated the political landscape. After Gotabaya Rajapaksa assumed the presidency, he appointed his brother Mahinda as prime minister. He then handed key positions to several other members of the family, making his brother Basil finance minister and another sibling, Chamal, irrigation minister. His son Namal was appointed minister of sports and youth affairs. All have subsequently resigned and fled into exile.
The appointments ensured that the dynasty wielded control over the state apparatus as well as major sectors of the economy. It was, essentially, State Capture.
“Their insatiable appetite for plunder took a poorly governed country and ruined it,” says Professor Neil Devota of the US’s Wake Forest University. To shore up their power base, they made a number of economically insane decisions, such as slashing taxes, which reduced the government’s tax revenue by 25%, and banning non-organic fertilisers. This crippled the lucrative agricultural sector and has led to crippling food shortages.
Finally, Covid-19 and the war in Ukraine pushed a teetering economy into the abyss. Covid all but destroyed the country’s essential tourist sector, and the war has resulted in soaring imported fuel and food prices.
South Africans may see a number of eerily similar parallels. However, there is one critical difference. Sri Lanka has been borrowing aggressively in foreign currencies, such as the dollar. As soon as its currency started collapsing, its ability to repay loans ended, forcing it to be the first Asian economy to default since 1999.
South Africa has been sensible not to get into a similar situation of dependence on foreign currency lenders. However, though this can postpone the eventual day of reckoning, it cannot delay it indefinitely. Unrelenting corruption and economic mismanagement can only end one way. Rajapaksa was forced to flee his country from angry hordes. Unless the ANC is able to arrest the decline of SA, its turn may come sooner than it might want to imagine. DM168
This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R25.