Sri Lanka’s economic crisis: How one family turned this ‘hidden jewel’ into a basket case

This was the scene in the Sri Lankan capital, Colombo, Saturday, as monthslong protests sparked by a crushing economic collapse reached a violent crescendo.

At the heart of the protests was an unprecedented explosion of public anger, directed toward one family: the Rajapaksas, a clan that has dominated Sri Lankan public life for years and is at the heart of the story of how this small and once vibrant South Asian island nation descended into a raging economic firestorm.

What happened on Saturday showed in the starkest of ways just how the story had changed, as Sri Lanka’s 22 million-strong population faced food and fuel shortages.

The country’s “renaissance” had followed the end of a brutal, decadeslong civil war, and it was heralded as an example for other conflict-ridden nations. Today, groaning under a staggering $51 billion pile of foreign debt that it can no longer service, Sri Lanka is deep in the red, locked in desperate talks for a bailout with the International Monetary Fund.

Ranil Wickremesinghe, who said this weekend that he would resign as prime minister as protestors stormed his home, had summed up the situation in an address to lawmakers last month: “Our economy has completely collapsed.”

What happened to Asia’s “hidden jewel” and to that “economic renaissance”? The answer involves the Rajapaksa family, a spate of bad decisions and the tide of inflation washing over much of the world.

A family affair

Wickremesinghe had only come into the job in May, taking power because of waves of anger directed against the Rajapaksas.

Mahinda Rajapaksa, the patriarch, was the prime minister, and president before that; during his time as president, he appointed one brother as defense minister — that brother, Gotabaya, later became president, and as of Saturday night in Sri Lanka he was still missing.

Over the years, other Rajapaksa brothers, cousins and assorted relatives have populated various parts of the Sri Lankan political hierarchy — from the ministry for economic development to the irrigation department to senior positions in Parliament and other public institutions. Indeed, the extent to which the family tree matched the map of power in Sri Lanka was almost unprecedented in modern times.

“You had a ruthless and politically skillful family in a government system that gave them immense powers, which they misused,” Alan Keenan, a longtime watcher of Sri Lanka at the International Crisis Group, told Grid.

Mahinda Rajapaksa became president in 2005 and succeeded soon after in crushing the long-running rebellion by separatists from the country’s Tamil minority community. Both the Tamils and the majority Sinhalese forces were accused of war crimes during the conflict. In the aftermath of the horrors, Rajapaksa and his family entrenched themselves in every area of government.

For a time, Sri Lanka prospered — at least on the surface; annual growth rose to around 9 percent in 2012. But as the family consolidated power, criticism grew within and outside Sri Lanka of the family fiefdom that the Rajapaksas were creating, and the corruption and mismanagement that came with it.

“Over time, what’s happened is that the Rajapaksas have made themselves the epitome of all the defects of governance that we have in the country, and they have exacerbated it by their corruption and their profligacy,” said Paikiasothy Saravanamuttu, one of Sri Lanka’s leading political commentators and the executive director of the Colombo-based Center for Policy Alternatives. “They have mismanaged government.”

The China factor

In a strange twist, Sri Lanka was also hurt by its strategic importance. The country sits just south of India, a key maritime stop in the Indian Ocean. For the U.S. and its regional allies, India chief among them, it is a small but critical nation — “the fulcrum,” as the State Department put it in a 2019 brief, “of the Indo-Pacific region.”

Certainly China has recognized the importance of Sri Lanka, and recently it has done something about it. The Chinese influence is apparent the moment you land in Colombo, the capital; on the coast, stretching out into the Indian Ocean, is what is known as the Colombo Port City project. It’s being built — a la Dubai — on reclaimed sand from the sea; underpinned by $1.4 billion in Chinese funding, the port was officially launched in 2014 during a visit by Chinese President Xi Jinping. Mahinda Rajapaksa did the deal — and welcomed Xi for the opening. Further south, also on Rajapaksa’s watch, Chinese loans funded another sprawling port and a new airport as well.

Yet China was hardly alone. Today, in addition to Beijing, Sri Lanka owes money to India and Japan, as well as to commercial financiers who bought its bonds in recent years. And here, too, the bills are coming due.

House of cards

As the Rajapaksas borrowed their way to build infrastructure and boost Sri Lanka’s GDP, what they didn’t do was focus on building a sustainable economic base to pay for it all. It’s a key reason, say analysts, for the current nightmare.

“A lot of the high growth rates were debt-driven. A lot of the road building and infrastructure projects were funded on debt … either because they were Chinese projects or sovereign bonds,” Keenan said. The result, he explained, was that “the whole economy has been distorted.”

Ultimately, however, Kennan said Sri Lanka has suffered most from bad decision-making at the highest levels of government. “In many ways, the economic problem in Sri Lanka is a result of a governance problem.”

Saravanamuttu, of the Center for Policy Alternatives, added: “A lot of the [governance issues and mismanagement] was a consequence of the concentration of power in the office of the presidency, because there is no real accountability or transparency in how that office functions at the end of the day.”

The farming fiasco

One story cuts to the heart of how that malfunction has hurt the country. And it involves a critical pillar of the Sri Lankan economy: farming.

In April 2021, the government banned imports of synthetic or chemical fertilizers. President Gotabaya Rajapaksa said the policy was designed to promote organic farming. The problem? The country, and the agricultural sector, which accounts for roughly 7 percent of economic output and employs 27 percent of the labor force, were woefully unprepared for the change.

They were right. Widespread protests followed the introduction of the policy, forcing the government to roll back the ban at year’s end — but the damage had been done. The sector suffered for months.

“Soaring food prices [in the wake of the fertilizer decision] resulted in social unrest across the entire country,” Ertharin Cousin, the former executive director of the World Food Programme, the United Nations food agency, told Grid. It fed — so to speak — the “political challenges the country is now facing,” she explained.

For all the complaints and accusations against the Rajapaksa family, it was the spike in prices that finally broke its grip on power: Amid growing popular anger, Mahinda was forced to resign as prime minister in May. Now Gotabaya is reportedly set to follow in his footsteps.

With the prime minister, Wickremesinghe, also on his way out, what happens next remains uncertain. But it will only make the need for an IMF bailout — negotiations for which were, until this weekend, being led on the Sri Lankan side by Wickremesinghe — that much more urgent.

Otherwise, as Wickremesinghe himself warned last month, the country looks set to “fall to rock bottom.”