APOCALYPSE ON CEYLON

In July, the events in Sri Lanka, a small South Asian island country, hit the headlines throughout the world. The greatest economic crisis since independence in 1948, the default announced in April, a huge inflation rate (54.6%) and acute shortage of fuel, food, medicines and basic necessities have caused the country to literally explode from within, culminating in the overthrow of President Gotabaya Rajapaksa.

Former prime minister Ranil Wickremesinghe of the ruling coalition became the new president after a vote in the country's 225-seat parliament. He will rule until November 2024, when a new head of state is to be elected in a nationwide vote.

But it is clear that the incumbent ‘new old’ Sri Lankan president is in no way capable of solving the problems that plague the island. After all, Wickremesinghe, who has led the government six times prior to becoming the new president, can be largely blamed for the existing situation. He is apparently an unpopular politician, as his private residence was recently burned by protesters.

What happened in Sri Lanka? Why does it have to suffer from an unprecedented economic crisis in its history? What caused the sudden depletion of the state's foreign exchange reserves to mere $50 million as of April 2022? Why did Sri Lanka fail to pay its foreign debt in May 2022 for the first time in its history?

History and reason

It's a good idea to refresh our knowledge of the country, which can be done thanks to many open sources available on the internet. Sri Lanka is a former British colony, formerly called Ceylon. In 2009, Sri Lanka saw the end of a long-standing bloody civil war between the Sinhalese majority (about 70% of the population), and the Tamil minority. Since that time the country turned to foreign borrowing. But as a result of poor management of loans, this has left Colombo (Sri Lanka's financial capital) with a permanent budget deficit and a growing foreign debt.  For a while, Sri Lanka could survive thanks to its key items of export.

"The island produces about 10% of the world's tea, reaching over 305,000 tonnes annually (third after India and China). The national economy is also well developed thanks to the produce of natural rubber, cinnamon and gemstone mining. According to the 2008 data, agriculture accounts for 20% of Sri Lankan exports (93% in 1972), while the main industrial item of the country is textiles (63% of exports). Annual GDP growth is around 5%. Sri Lanka has the highest GDP per capita in South Asia ($4,300 in 2008).

All these statements, however, are the thing of the past. The government blames the coronavirus pandemic and the resulting drop in tourism. This undoubtedly played a significant role, but there are other opinions as well. For example, some experts point to the country's controversial tax reform, or the removal by the developed countries in January 2005 of clothing import quotas that had been in place (under the WTO) for over 30 years. Some experts also suggested that the poor situation on the island was due to the ill-advised conversion to ‘organic farming’. Thus, banning of chemical fertilisers has virtually destroyed the country's agriculture. So much so that Sri Lanka was compelled to import rice.

According to Prof. Michael Schellenberger, founder of Environmental Progress and author of bestsellers Apocalypse Never and San Francisco, the ban on chemical fertilisers introduced in April 2021 left a third of the country's farmland unused, 85% of farmers lost their crops, rice production fell by 20% and vegetable prices rose. But most importantly, tea production, which brought in $1.3 billion annually, fell by 18% between November 2021 and February 2022. And, of course, the final blow to Sri Lanka's economy was the sharp rise in international food and energy prices.

Future plans

Reportedly, one of Prime Minister Wickremesinghe’s first steps as president will be to conclude negotiations with the IMF on emergency aid to the country as soon as possible. He said the government of former President Rajapaksa was not telling the truth about Sri Lanka going bankrupt and having to approach the IMF. "We don't need five or ten years. By the end of next year we will start stabilising and by 2024 we will definitely become a functioning economy that will start growing," Wickremesinghe outlined his programme in his interview with CNN. Yet it is clear that his plan is neither novel nor original.

Notably, most of the country's external debt is held by private shareholders on international loan markets, financial institutions such as the Asian Development Bank. China, India and Japan are among the state holders of Sri Lankan external debt. Incidentally, the Western media are actively highlighting the failure of a large number of projects under China's One Belt, One Road initiative in particular. In their view, the huge loans have only worsened the financial burden of vulnerable governments. For example, the American Enterprise Institute claims that the cost of the Chines initiative in developing countries by the end of 2021 was $838 billion.

Obviously, this fact provides the key information about Sri Lanka: the access of the country to the vital maritime routes of South Asia, its unique location between the Straits of Malacca and the Persian Gulf makes it far more important than just a small Asian state. From ancient times until the 16th century, Sri Lanka's ports and cities appeared on many historically significant map documents and served as marinas for seafarers, as well as trade and exchange hubs along the historical Silk Road. The former Ceylon is now at the heart of regional rivalry between India and China, as well as China and the US, the collective West. India and Sri Lanka are linked by border security, migration flows, and logistics. And China and Sri Lanka are linked by a shared future under the global One Belt, One Road initiative.

So far China has traded with foreign countries mainly by sea. In 2012, at the 18th National Congress of the Chinese Communist Party, Chinese President Hu Jintao set a specific goal of making China a great maritime power. In October 2013, the Chinese authorities announced the idea of maritime Silk Road in the 21st century.

Interestingly, China's diplomatic activities in the Indian Ocean are referred to as the String of Pearls associated with the construction of various infrastructure projects designed to serve Beijing's economic and political ambitions. It is no coincidence that the port of Hambantota on the southern tip of Sri Lanka is also among the port projects noted for China as potential strongholds in the Indo-Pacific region, in addition to Gwadar port in Pakistan, Ko Rong in Cambodia and Kyaukphyu in Myanmar. Beijing is investing heavily in these facilities, because they provide it with alternative routes for energy supplies that bypass the Straits of Malacca. The development of the port has been touted by official Colombo as a big deal, an important step in the country's modernisation. In addition to the port itself, China has also built an industrial park and a modern airport there. Can these developments in Sri Lanka be viewed as a blow to the Chinese plans? That will depend on China's next steps. And, of course, on India. After all, China's presence in Sri Lanka allows it to keep an eye on South India. And this makes New Delhi very nervous. India is now actively trying to rescue Sri Lanka. The current crisis is an opportunity for it to consolidate its influence in this strategically important country.

In other words, it is a disappointing fact that the recent events in Sri Lanka were a direct consequence of regional and global processes related to the major events of recent years, including the COVID-19 pandemic, energy crisis, war in Ukraine, redistribution of spheres of influence and transit routes between the major world powers. It is therefore likely that Sri Lanka will not be the only state suffering from similar events.