Protesters against the government, angry at the lack of electricity, shortages of basic goods and rising prices, are demanding the removal of President Gotabaya Rajapaksa, but the retired military commander has used force to try to maintain control.
The violence and political turmoil that engulfs 22 million island nations comes 13 years after a brutal civil war ended in bloody disintegration in which tens of thousands of people were killed.
India, neighboring Sri Lanka in the north, has provided billions of dollars in loans to help pay for basic necessities.
China, which has invested heavily in infrastructure in recent years in what experts say is an attempt to expand its influence across Asia, has been less vocal in its efforts than in supporting efforts by the island nation to restructure its debt.
Important talks between Sri Lanka and the International Monetary Fund (IMF) on a bailout plan, as well as plans to restructure its sovereign debt, could be disrupted.
HOW DID THIS COME TO THIS?
Analysts say that the economic mismanagement of governments in a row has weakened Sri Lanka’s public finances, so that national expenditure exceeds its revenues and the production of marketable goods and services at inadequate levels.
The situation was exacerbated by deep-seated tax cuts imposed by the Rajapaksa government soon after it took office in 2019. Months later, the COVID-19 pandemic struck.
It wiped out much of Sri Lanka’s revenue base, particularly from lucrative tourism, while payments from nationals working abroad declined and were further lost by the inflexible exchange rate.
Concerning fiscal concerns and its inability to repay large foreign debts, rating agencies downgraded Sri Lanka’s credit rating from 2020 onwards, eventually shutting the country out of international financial markets.
To keep the economy afloat, the government leaned heavily on its foreign exchange reserves, depleting them by more than 70% in two years.
WHAT HAS THE GOVERNMENT DONE?
Despite the rapidly deteriorating economic environment, the Rajapaksa government initially stopped talks with the IMF.
For months, opposition leaders and some financial analysts urged the government to take action, but it kept hoping that tourism would recover and that remittances would recover.
Finally, aware of the scale of the brewing crisis, the government sought help from countries including India and China, regional superpowers that have traditionally pushed for influence over the military island.
In all, New Delhi is said to have provided more than $ 3.5 billion in support this year.
Earlier in 2022, President Rajapaksa asked China to restructure repayments of about $ 3.5 billion of debt to Beijing, which in late 2021 also granted Sri Lanka a $ 1.5 billion yuan swap agreement.
Sri Lanka has finally begun talks with the International Monetary Fund.
Despite external support, fuel shortages have caused long queues at petrol stations as well as frequent power outages and some important medicines have been scarce.
WHAT DOES NEXT DO?
President Rajapaksa has sought the support of all political parties in parliament to form a coalition government, an offer that many, including allies of the governing coalition, have rejected.
On Monday, Prime Minister Mahinda Rajapaksa, the president’s older brother, wrote in his letter of resignation that he was resigning so that an interim government of all parties could be formed.
The president plans to meet with opposition politicians with the hope of forming a new government within days, according to a government spokesman.
But thousands of protesters, some of whom have been camping in the streets for weeks with the song “Gota (baya) go home”, also want the president to resign.
Protesters, supporters and opponents of the government clashed on Monday in the commercial capital of Colombo with violence and houses and cars in other parts of the country have been set on fire.
Some business groups in Sri Lanka are leaning towards the country’s politicians to find a quick solution.
In a statement on Tuesday, the Joint Apparel Association Forum, representing an important garment industry in Sri Lanka, said it was “important” for a new government to take over.
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