The Daily - How Sri Lanka’s Economy Collapsed

Episode Date: July 14, 2022

In recent days, the political crisis in Sri Lanka has reached a critical point, with its president fleeing the country and protesters occupying his residence and office. Today, “The Daily” explores how the island nation, whose economy was once held up as a success story in South Asia, came apart — and why it’s a cautionary tale.Guest: Emily Schmall, a South Asia correspondent for The New York Times.Want more from The Daily? For one big idea on the news each week from our team, subscribe to our newsletter. Background reading: Yesterday, mass demonstrations and tear gas filled the streets of Colombo, the Sri Lankan capital, and late into the night, protesters clashed with the police outside Parliament.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday. 

From The New York Times, I'm Sabrina Tavernisi. This is The Daily. In recent days, an uprising in Sri Lanka has reached a critical point, with its president fleeing the country and thousands of protesters occupying his palace. country and thousands of protesters occupying his palace. Today, my colleague Emily Schmal on how the island nation, whose economy was the envy of South Asia, came apart and why it's a cautionary tale for the developing world. It's Thursday, July 14th. So, Emily, you're in Sri Lanka, and we've seen these pretty crazy images of crowds of protesters over the past couple of days.

Tell me what happened. Well, for months in the capital, Colombo, and elsewhere around the island, people have been protesting, demanding that the president and the prime minister step down because of this economic crisis that has engulfed the country. And it culminated on Saturday. Right in front of the presidential mansion. The organizers of this event had put out the call, as they have been doing for months, inviting people from around the country to join this protest in Colombo.

They were hoping that maybe 60,000 people would come. Instead, by some estimates, there were 300,000 people. So just the force of that many people against a relatively small security staff guarding these properties, it became somewhat inevitable that people would make their way in, and they did. President Gotabaya Rajapaksa wasn't there. He had already fled somewhere. But they settled in and they took over. So I'm standing just outside of the President Gotabaya Rajapaksa's master bedroom, where a group of young men are sprawled on the large bed.

I went to the presidential mansion on Sunday, and the scene was incredible. The place is mainly tidy. There isn't much damage and people are streaming in and out of the house as though it were any sort of museum. Some of them were making themselves quite at home. Someone has hung a pair of men's boxer shorts from one of the light fixtures on the wall.

There were people sleeping on the president's bed. There were other people swimming in his pool. There was even a man cooking some rice in a wok in one of the kitchens. Wow. So they've really kind of set up shop in the presidential palace, these ordinary people. Yes, absolutely. And the organizers of the protest have encouraged people to come to these places, describing it as a once-in-a-lifetime opportunity for them to see how the leaders lived. And protesters vowed to stay in these buildings until a new government forms, one that can bring immediate economic relief to people who have been suffering for months.

So Emily, this sounds like a pretty strange kind of dream sequence series of events for Sri Lanka. You've been covering the region for a long time. Was it surprising to you? It was surprising because Sri Lanka was this economic success story. It was the envy of all of its neighbors in South Asia. the envy of all of its neighbors in South Asia. I remember during a trip in 2018, just marveling at how here was a country that had been a British colony up till 1948, and then had been in civil war for nearly 30 years, and less than a decade out from that war ending, they seem to have built this really modern capital city with high-rise towers and fancy restaurants and luxury hotels. And so to see it less than four

years later as this place of just utter chaos where the government is missing in action and protesters have effectively taken over because the crisis of the economy and people's desperation has become so bad. It was shocking. So, Emily, how did we get from what by all accounts looked like a pretty well-functioning, well-run state to protesters overrunning the presidential palace and lounging the president's bed? Well, we have to go back to 2005 when this wealthy, powerful farming family, the Rajapaksas, really enter the picture. They had been involved in politics for a long time. the picture. They had been involved in politics for a long time. But in 2005, the eldest Rajapaksa brother, Mahinda Rajapaksa, runs for office, runs for president on a campaign that he will end

this long civil war. And he wins election and immediately appoints his brother, a career military officer, as his defense secretary. And together, they launch this brutal campaign against the Tamil Tigers, this minority group in the north of the country that is seeking to be an independent country. And they win, and they're lauded as heroes. They're lauded as heroes. So once they end this civil war, and as you say, end up heroes for much of the country, what do they do next? So the president, Mahinda Rajapaksa, really wants to develop the country. He wants Sri Lanka to be the next Singapore. Sri Lanka to be the next Singapore. In other words, a modern country with a booming economy and a big middle class. But the country is out of money. I mean, the government has spent

a small fortune putting down these rebels in the north. And so they have to go take out some loans. they have to go take out some loans. So he goes to the International Monetary Fund, he goes to China, Japan, even India to find money to invest in infrastructure. And they get these loans, they start building highways and ports and airports, all with this hope of achieving this vision of making Sri Lanka this booming modern economy in the middle of South Asia. And it works. So they go from being this small, mostly tea exporting economy to an economy that is reaching a lot of people, and that's attracting a lot of people. When you can go from Sankis to Mountain Mist in just four hours, that's so Sri Lanka.

And all of a sudden there are a network of high-end hotels and tourism services to take people all over the island to their beautiful beaches and their famous temples. When you can marvel at elephants in the morning and then meet some exotic birds, bears, and leopards for lunch, that's so Sri Lanka. Tourists from Russia, the UK, and elsewhere in Europe start coming in droves,

and newly middle-class people from India and China come too. So spiritual. So bold. So colorful. That's so Sri Lanka. And it seems like the economy is really prospering. So it worked. I mean, they built it and people came. Yes, people came and

they came with money. Sri Lanka saw this phenomenal growth from 2005 to 2015. Their economy more than tripled. Their economy more than tripled. Wow. So what did that boom look like for an ordinary person in Sri Lanka? Well, not every Sri Lankan benefited in the same way. In the rural areas where people work on rice paddy or tea plantations, their lives improved, but not spectacularly. But in Colombo, where tourists were spending money on their way to beach resorts or old colonial hill stations, money was filtering in. And there was one woman's story that really encapsulated this for me. This woman, Sanda Mali Purnima, who grew up in Colombo in a pretty modest background. Her parents worked, but there was no money for frills.

She went to a public school and they didn't have cooking gas or a kitchen. So her mom actually cooked all their food out in the back of their house over a wood fire. But during this period of growth, Surnuma is able to go to college and she meets a guy. They get married and he's able to buy his own auto rickshaw, which he can use to move all these tourists around the capital. And she actually opens her own salon and they have plenty of money to send their three kids to private school. And Surnima's story is a pretty typical one. A lot of families are entering the middle class this way, with new jobs, new opportunities,

especially in areas where there's been a big tourism boom. So it sounds like what the Rajapaksa brothers were trying to do worked. Sri Lanka was experiencing a real economic success. Yeah, it looked like that. But as time went on, the system that the family had built started to show some cracks. We'll be right back. So, Emily, you talked about how the system that the Rajapaksa brothers had built was starting to show some cracks. What were they?

Well, essentially, the government had taken out a whole lot of loans from a lot of places and many of these loans like some they had taken from chinese lenders were short-term and very pricey and basically they were struggling to service the debt they started having to take out more debt just to pay off the interest on the original debt. It was sort of like when you have a credit card and you max it out and you have to pay the debt that's coming due, so you take out another credit card. And it just becomes this vicious cycle. And at the same time that they were taking out billions of dollars in loans, they were using some of this money on projects in their home district, this place called Hamantota in the south of Sri Lanka, where there are no tourists, there are no famous beaches, but they used Chinese loans to build a cricket stadium named after the president, Mahinda

Rajapaksa. In their home district? In their home district. And they built an airport, and they built a shipping port. And did people come to the cricket stadium? Did people come to the things that they built in their home district? No, they didn't then and they still don't. These projects have never produced any sort of return. Okay, so that sounds like bad management. Yeah, at the very least. But at the same time, people around Sri Lanka also started to wonder if corruption was at play. Because they saw these mega projects that no one was using.

And they also saw this family becoming richer and more powerful. Building homes and expanding their mansions, driving luxury imported cars, hanging out with the elite and the richest people of Sri Lanka. So there's anger and frustration and a little bit of worry in the country. But at the same time, the economy is still doing pretty well. People are going out. They have disposable incomes. They're buying more than they ever have.

And the picture is still pretty rosy. So from the outside, it sounds like everything looks okay. Yeah, from the outside. But economists are starting to look at the government's balance sheet. But economists are starting to look at the government's balance sheet, and they're worried because they can see that this debt is just not sustainable, that if the government continues with its borrowing like and the government that follows tries to right back at power in 2019. And they've picked up right where they've left off. They are back to taking on more debt and then they make the problem even worse.

So at this point, Sri Lanka has this massive debt that it's struggling to pay off. So what happens next? COVID-19. And Sri Lanka, which has built this economy that's based on tourism, basically shuts it all down. They have one of the most stringent lockdowns of anywhere in Asia. And they're not issuing visas for tourists anymore. At all?

No, not at all. Wow. And so all of that essential revenue that was coming in from the UK and Europe and Russia and the US and China and India suddenly stops. And people are caught off guard. They're not prepared for the economy to stop so suddenly. But they think that the economy is going to be able to rebound when the pandemic ends. But actually, when the restrictions lift, they leave their homes and they find that many things have changed in the country. They go to gas stations and find that sometimes the gas stations are low on gasoline and grocery stores have empty shelves. Okay, so there's some real basic scarcity that has emerged.

Not enough food, not enough fuel. Yes, that's right. And basically, since the end of 2021, Sri Lankans have been struggling to get by. And then in February, Russia invades Ukraine. Sri Lanka is already going through an economic crisis. Rising oil prices amid the Russia-Ukraine conflict are making the situation worse. And for a country that imports almost everything it consumes, prices skyrocket, and it makes the scarcity so much worse.

The local currency has almost halved in value against the dollar in recent months, and inflation is running at 30%, the highest rate in Asia. Sri Lanka has defaulted on its debt and is running out of foreign currency needed to import essential goods like food, medicine and gas. And it doesn't have enough money for the essentials, so basic medications disappear. And gas becomes even more scarce.

We wait in line for 8, 20, 40 hours just to get some fuel. Gas no, petrol no, diesel no. Too much problem. It's a nightmare for me, for everybody. I don't know what the future is going to be, yes. So with this invasion, a situation that for many Sri Lankan families had been difficult, becomes impossible. That salon worker I talked about before, Sanamali Purnima, she doesn't have anyone coming into her salon because no one has that kind of disposable money anymore. driver, he isn't picking up any taxi fares because he'd have to wait in line for literally days just to get enough gas to drive around the city for a single day. And at the same time,

the government is instituting these policies to try to conserve fuel. So it closes schools. Because they didn't have an electricity for schools? Yeah, because they don't have fuel for the electricity to keep the power on. So with schools closed, the whole family is home and they're struggling to scrounge up enough money to buy really basic food like lentils and rice. And because there's no fuel for cooking, now S Sanamali is back to cooking whatever food they can buy on an open flame, just like her mother did growing up. Wow. So it's getting really, really bad. And that's when the protests start.

People who are middle class, who were used to a certain quality of life, suddenly can't get the basics and they start spilling out into the streets demanding change. And that's how we get to this past weekend where hundreds of thousands of people are on the streets of Colombo and many of them are in the president's mansion. So Emily, I'm talking to you on Wednesday night, your time. And I know a lot is in flux. But what's your best guess about what's going to happen in Sri Lanka? It's really hard to say because earlier today, the president fled the country and he appointed the prime minister as the acting president. But it's clear that protesters are not going to accept that. In fact, they stormed the prime minister's office just hours before he was named acting president. So he went on TV and he said that the military was going to take

control of the situation. He called some of the protesters fascist. He declared a state of emergency and asked police to clear out the government buildings that the protesters had seized. But they're still there. And it's just not clear that he has any authority. So nobody seems to be in control. And at this point, what are the protesters asking for? I mean, if they won't accept the prime minister, what do they want right now?

They want a revolution. I mean, they want to change the Constitution. They want to incorporate new rights into legal processes, but they're not really a coalition in any political sense. There's no leader. They're disparate aims and there's no political coalition in parliament either. Lawmakers are supposed to return to parliament later this week and hash out how to form a new government. But it's really not clear that anybody who hopes to be president will get enough support to do so. Emily, what in the end is the takeaway from all of this? I mean, is Sri Lanka in this situation because it was run by a

family that just ran it into the ground? Like, they were always incompetent and it was never going to work? Or is it a set of economic circumstances that has really affected every middle-income country? You know, COVID plus Ukraine war equals high food prices, high fuel prices, and collapsing revenues, particularly for tourist-reliant places like Sri Lanka? Well, it's really both. The Rajapaksas acted with a lot of hubris. They had a vision for the country. They wanted Sri Lanka to be the next Singapore. But they were very unwise in how they went about it. They loaded the government with debt that they could never hope to repay. And they spent it foolishly on these vanity projects that have never generated any revenue.

generated any revenue. But also, this is something that economists say is hitting a lot of developing countries who are facing the same problem, too much debt on their balance sheets that is looking unsustainable. So does that mean we will see political or economic instability in other countries like Sri Lanka? Well, I can tell you that in Nepal, another country in South Asia that has a similar economy to Sri Lanka's. It depends a lot on tourism. People come to Nepal to climb Mount Everest and other famous peaks. And there's been a similar effect where the country had taken on loans from international banks and other places to be able to develop the country. But after two years of a pandemic and now runaway inflation, they're finding it harder and harder to pay down that debt. And at the same time,

they're running low on reserves to pay for anything else. So we're starting to see people line up for fuel in Kathmandu, the capital. And the fear is that this isn't a problem at all unique to Sri Lanka, but is one that we're going to see playing out in lots of other developing countries. So Sri Lanka may be one of a whole number of countries that end up having some political instability. That's the fear. Emily, thank you. Thank you. We'll be right back.

Here's what else you should know today. Thank you. rate hikes from the Federal Reserve, which has been trying to tamp down the rising prices. Food prices jumped by 10.4 percent, the biggest annual increase since 1981. And rent climbed at the fastest monthly pace since 1986. Surging inflation has hurt President Biden, whose approval ratings have taken a hit as Americans' wages fall further behind the rising cost of living. And... Today in Istanbul, we have seen a critical step, a step forward, to ensuring the safe and secure export of Ukrainian food products through the Black Sea. Russian and Ukrainian negotiators met in Istanbul in a desperate effort to release huge stores of grain

stuck in Ukrainian ports that are blocked by Russian warships. In a world darkened by global crisis, today at last we have a ray of hope. A ray of hope to ease human suffering and alleviate hunger around the world. The United Nations Secretary General said that officials had made progress but that no formal agreement

had been reached. Ukraine is a major grain producer and many countries in the developing world depend on it. Today's episode was produced by Claire Tenesketter, Carlos Prieto, Ricky Nowetzki, Rochelle Bonja, and Jessica Chung, with help from Asa Chaturvedi. It was edited by M.J. Davis-Lynn, with help from John Ketchum.

Contains original music by Marian Lozano, and was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Landsberg of Wonderly. That's it for The Daily. I'm Sabrina Tavernisi. See you tomorrow.