News
What’s happening in Sri Lanka and how did the economic crisis start?
By R Ramakumar, Professor of Economics, Tata Institute of Social Sciences
The island nation of Sri Lanka is in the midst of one of the worst economic crises it’s ever seen. It has just defaulted on its foreign debts for the first time since its independence, and the country’s 22 million people are facing crippling 12-hour power cuts, and an extreme scarcity of food, fuel and other essential items such as medicines.
Inflation is at an all-time high of 17.5%, with prices of food items such as a kilogram of rice soaring to 500 Sri Lankan rupees when it would normally cost around 80 rupees. Amid shortages, one 400g packet of milk powder is reported to cost over 250 rupees, when it usually costs around 60 rupees.
On April 1, President Gotabaya Rajpaksa declared a state of emergency. In less than a week, he withdrew it following massive protests by angry citizens over the government’s handling of the crisis.
The country relies on the import of many essential items including petrol, food items and medicines. Most countries will keep foreign currencies on hand in order to trade for these items, but a shortage of foreign exchange in Sri Lanka is being blamed for the sky-high prices.
Many believe Sri Lanka’s economic relations with China are a main driver behind the crisis. The United States has called this phenomenon debt-trap diplomacy . This is where a creditor country or institution extends debt to a borrowing nation to increase the lender’s political leverage if the borrower extends itself and cannot pay the money back, they are at the creditor’s mercy.
However, loans from China accounted for only about 10% of Sri Lanka’s total foreign debt in 2020. The largest portion about 30% can be attributed to international sovereign bonds. Japan actually accounts for a higher proportion of their foreign debt, at 11%.
Defaults over China’s infrastructure-related loans to Sri Lanka, especially the financing of the Hambantota port, are being cited as factors contributing to the crisis.
But these facts don’t add up. The construction of the Hambantota port was financed by the Chinese Exim Bank. The port was running losses, so Sri Lanka leased out the port for 99 years to the Chinese Merchant’s Group, which paid Sri Lanka US 1.12 billion.
So the Hambantota port fiasco did not lead to a balance of payments crisis (where more money or exports are going out than coming in), it actually bolstered Sri Lanka’s foreign exchange reserves by US 1.12 billion.
Post-independence from the British in 1948, Sri Lanka’s agriculture was dominated by export-oriented crops such as tea, coffee, rubber and spices. A large share of its gross domestic product came from the foreign exchange earned from exporting these crops. That money was used to import essential food items.
Over the years, 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.
For this reason, 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 (so exports would become more viable).
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 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.
Value-added tax rates (akin to some nations’ goods and services taxes) 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 because of these tax cuts.
In March 2020, the COVID-19 pandemic struck. In April 2021, the Rajapaksa government made another fatal mistake. 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, which was withdrawn in November 2021, led to a drastic fall in agricultural production and more imports became necessary.
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.
Because there is less food and other items to buy, but no decrease in demand, the prices for these goods rise. In February 2022, inflation rose to 17.5%.
n all probability, Sri Lanka will now obtain a 17th IMF loan to tide over the present crisis, which will come with fresh conditions.
A deflationary fiscal policy will be followed, which will further limit the prospects of economic revival and exacerbate the sufferings of the Sri Lankan people. (PTI)
News
Govt. seeks INTERPOL assistance to bring Basil Rajapaksa back
The Criminal Investigation Department (CID) and Police Headquarters are in the process of seeking INTERPOL assistance to secure the return of former Finance Minister Basil Rajapaksa to Sri Lanka, police sources said yesterday.
A senior police officer said steps were being taken to obtain international assistance to bring Rajapaksa back to the country to face court proceedings relating to two cases in which arrest warrants have been issued against him.
The Colombo Fort Magistrate’s Court last week and the Matara Chief Magistrate’s Court several weeks ago issued warrants for Rajapaksa’s arrest after he failed to appear before court.
Colombo Fort Magistrate Pasan Amarasena recently directed the CID’s Illegal Assets Investigation Division to arrest and produce Rajapaksa before court over allegations of misappropriating Rs. 7.8 million belonging to the Sri Lanka Tourism Promotion Bureau.
According to investigators, funds allocated to the Bureau in 2014 for promotional activities had allegedly been used to distribute 12,000 T-shirts during the Uva Provincial Council election, resulting in a financial loss to the Government.
The Magistrate also released former Tourism Promotion Bureau Managing Director Rumi Jaufer, who had been in remand custody, on two personal bail bonds of Rs. 1 million each and imposed a foreign travel ban on him. Investigators said charges had been filed under the Public Property Act.
Meanwhile, Matara Chief Magistrate Chaturanga Eranga Dissanayake issued a warrant on May 22 for Rajapaksa’s arrest over a case filed by the Police Financial Crimes Investigation Division regarding the purchase of a one-and-a-half-acre land plot at Brown’s Hill, Eliyakanda Road, Matara.
Rajapaksa’s counsel had informed court that the former minister was overseas receiving medical treatment and submitted medical reports in support of the request for his absence. However, the Magistrate, noting his repeated failure to appear before court, ordered the issuance of a warrant.
Rajapaksa is believed to be in the United States, where he has reportedly been receiving medical treatment. His exact location has not been disclosed publicly.
Meanwhile, Minister of Public Security Ananda Wijepala said the same legal measures used to bring back drug traffickers and organised criminals hiding overseas would be applied to former ministers and politicians wanted by courts.
Speaking at a media briefing in Kandy on Thursday, Wijepala said the law would be enforced equally without considering a person’s political status or position.
He said international mechanisms, including INTERPOL notices, would be used against former ministers and politicians abroad who had warrants issued against them.
A police source said the authorities were considering obtaining INTERPOL assistance in the case of Basil Rajapaksa. An INTERPOL Red Notice, if issued, would serve as a request to locate and provisionally arrest a person pending extradition proceedings, while the final decision on surrender would be taken according to the laws of the country where the individual is found.
by Norman Palihawadane and SK Samaranayake
News
Ravi warns against attempts to stir communal tensions over Easter attacks probe
New Democratic Front (NDF) MP Ravi Karunanayake on Thursday warned against attempts by certain sections of society to incite racial and religious tensions under the guise of seeking justice for the victims of the 2019 Easter Sunday terror attacks.
Addressing a press conference in Colombo, Karunanayake called for a genuine and impartial investigation into the attacks, while cautioning that the tragedy should not be exploited to undermine communal harmony or derail ongoing investigations.
“There are attempts by some interested parties to create communal disharmony and sabotage opportunities for a genuine investigation into the Easter Sunday attacks,” he said.
Karunanayake, who identified himself as a member of the Catholic community, said he was deeply saddened by the conduct of certain individuals and groups seeking to exert influence and pressure on the investigative process.
“I am saddened to see the conduct of some of our religious leaders exerting influence and pressure on ongoing investigations,” he said, stressing that any inquiry into the attacks should be guided by the principles of justice and humanity rather than political or sectarian interests.
The MP said there was no justification for promoting racism or religious extremism in the country and urged all communities to work towards preserving the longstanding coexistence among Sinhalese, Tamils, Muslims, Burghers and Malays.
“We must return to a society where all communities live together with mutual respect and affection. Humanity must come before any religious identity, whether one is Catholic, Muslim, Hindu or Buddhist,” he said.
Karunanayake emphasized that the ultimate objective of any investigation should be to uncover the truth and deliver justice to the victims while safeguarding national unity.
“Hatred must be eliminated, not cultivated. Any investigation into the Easter Sunday attacks should be conducted in a manner that preserves the social fabric of the nation,” he said.
He reiterated his support for a credible and transparent investigation into the attacks, adding that justice could only be achieved through an independent process free from undue influence and attempts to inflame communal sentiments.
News
AG undertakes High Court Judge will not be summoned over Yoshitha Rajapaksa case
- Initial report detailed High Court Judge summoned another Judge regarding order.
- Writ application filed by three senior Bar members protecting Rule of Law.
- Dr. Romesh de Silva PC argued Judges cannot be questioned on judicial orders.
- Court issued interim order stopping steps on the summons.
- Attorney General later gave undertaking Judge would not be summoned as witness.
- Petitioners accepted relief; proceedings ended as principle accepted
In a first time occurrence in the history of the country, a High Court Judge, at the request of the Attorney General’s Department, issued summons on another High Court Judge in order to question him regarding the correctness and accuracy of an order made by him.
The matter arose in criminal proceedings instituted against Yoshitha Rajapaksa.
Thereafter, three senior members of the Bar instituted filed a writ application in the Court of Appeal seeking to quash the summons, stating that their objective was to protect the Rule of Law and the independence of the Judiciary. The Petitioners were President’s Counsel Uditha Egalahewa, President’s Counsel Farman Cassim and senior Attorney-at-Law Sugath Caldera.
The case was taken up on June 2 and Dr. Romesh de Silva, PC, appearing for the Petitioners and leading several President’s Counsel, submitted in the Court of Appeal that the application had been filed in the public interest to safeguard the Rule of Law and the independence of the Judiciary.
Counsel drew the attention of Court to the Constitution, which recognizes the independence of the Judiciary as an intangible heritage of the people of Sri Lanka. He submitted that Sri Lanka had consistently recognized and protected judicial independence.
Dr. de Silva expressed appreciation to the three Petitioners for having come forward to protect the Rule of Law and the independence of the Judiciary. He stated that it was the duty of the Bar to protect the judiciary, because Judges by nature of their office cannot defend themselves.
He submitted that a Judge could not be questioned regarding an order made by him in his judicial capacity. Counsel contended that judicial orders are subject to appeal and that, ultimately, orders of the Supreme Court are final and conclusive. He argued that no Judge, whether of a primary court or the Supreme Court, could be questioned regarding the correctness or accuracy of an order delivered in the exercise of judicial functions.
Counsel accepted that a judicial order itself may be subjected to scrutiny and analysis in an appropriate forum. However, he submitted that the Judge who delivered the order could not be questioned concerning its correctness.
Referring to the facts of the present case, Dr. de Silva submitted that the High Court Judge had been summoned to explain the basis upon which he had made the order in question. He maintained that, irrespective of the correctness of the order itself, the sole issue before Court was whether a Judge could be compelled to answer questions regarding an order delivered by him. Counsel submitted that such a course was totally impermissible.
State Counsel, in lengthy submissions, objecting to the interim order and notice informed Court that the intention behind summoning the Judge had been to question the Judge regarding the procedural steps adopted by him and to demonstrate that the order had been made contrary to law.
The Court of Appeal, comprising the President of the Court of Appeal Justice Rohantha Abeysuriya and Justice Priyantha Fernando, thereafter adjourned to consider the matter and subsequently issued an interim order preventing any further steps being taken pursuant to the summons that had been issued.
The interim order was made operative for a period of one week in order to afford the Attorney General an opportunity, if necessary, to make further submissions.
When the matter was next called on June 12, State Counsel informed Court that the Attorney General had reconsidered his position and would give an undertaking to the Court of Appeal that the High Court Judge would not be summoned to give evidence.
Upon a request made by Dr. de Silva and after hearing submissions, the Attorney General further undertook that the Judge’s name would be removed from the list of witnesses filed in the High Court.
The Petitioners took the position that the undertakings furnished by the Attorney General substantially granted the relief sought in the application and accordingly stated that the proceedings could be brought to an end, as the principle contended for by the Petitioners had been accepted.
Dr. de Silva thanked the Attorney General for his reconsidered position.
It is noted that the State Counsel who appeared on behalf of the Judge who had issued the summons had previously appeared as junior counsel for the State before that same Judge when the summons had originally been issued at the request of the State.
Dr. Romesh De Silva PC with
Mr. Ikram Mohommed PC
Mr. Manohara De Silva PC
Mr. Rohan Sahabandu PC
Mr. Sanjeewa Jayawardena PC
Mr. Saliya Peirs PC
Mr. N.R Sivendran AAL
Mr. Niran Anketell AAL
Mr. S.V Niles AAL
Mr.Pasindu Bandara AAL
Mr. Sahan Ginige AAL appeared for the Petitioners. Mr Oswald Perera State Counsel with Sajitha Bandara State Counsel appeared for the Attorney General and the second Respondent Hon Udesh Ranatunga under whose hand the Summons has been issued. Mr Chandaka Jayasundera PC appeared for Hon Sahan Mapa Bandara the third Respondent on 12th June 2026.
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