What's goin' on in your mind is what I ask ya/ But like Yo-Yo, you don't hear me though / You wear a rag around your head/ And you call yourself a "dynasty"
At the height of their power, four brothers from Sri Lanka’s Rajapaksa dynasty held the presidency and the prime minister’s office as well as the finance, interior and defence portfolios, among others. But just when the Rajapaksa clan seemed invincible, an economic crisis of their own making led to their undoing. Sri Lanka’s beleaguered government faces new pressure to resign from influential Buddhist leaders over the island’s escalating economic crisis. The country’s worst downturn since independence in 1948 has brought widespread hardships to its 22 million people, with months of regular blackouts and acute shortages of food and fuel.

Why is Sri Lanka’s economy in crisis?

Sri Lanka’s foreign currency reserves have virtually run dry. In May it failed to make a payment on its foreign debt for the first time in its history. The government blames the Covid pandemic, which affected Sri Lanka’s tourist trade – one of its biggest foreign currency earners. It also says tourists have been frightened off by a series of deadly bomb attacks on churches in 2019. However, many experts say economic mismanagement is to blame. At the end of its civil war in 2009, Sri Lanka chose to focus more on providing goods to the domestic market, instead of trying to break into foreign ones. So income from exports remained low, while the bill for imports kept growing. Sri Lanka now imports $3bn (£2.3bn) more than it exports every year, and that is why it has run out of foreign currency. At the end of 2019, Sri Lanka had $7.6bn (£5.8bn) in foreign currency reserves. By March 2020 this had fallen to $1.93bn (£1.5bn) and recently the government said it had just $50m (£40.5m) left. The government has also racked up huge debts with countries including China, to fund what critics have called unnecessary infrastructure projects

China and the rise of Rajapaksas

The current situation in Sri Lanka is majorly a product of populism and populist policies. In this case, it is significant to assess the rise of Rajapaksas as the dominant force in Sri Lankan politics. Mahinda Rajapaksa began his first tenure as the president in 2005. He was assisted by his siblings who held key portfolios in the government, including the Secretary of Defence. Their ability to end more than two and half decades of civil war through iron-fist policies had, however, garnered mass appeal from the Sinhala nationalists. Their policies were so popular that the Rajapaksas won the 2019 elections by vastly focusing on national security alone. China’s lack of interest in the internal developments in Sri Lanka and their defence of the Rajapaksas against charges of human rights violations further cemented this relationship. But this legacy and successful end to the civil war was possible only with China’s fast-tracked and unrestricted supply of weapons, arms, ammunition, and artilleries to the regime. This was essential at a time when the West was concerned about human rights violations and India was more anxious about the plight of the Tamils. The Sri Lankan leadership had thus found a new partner to balance the West and India and to overcome their pressure. This lack of heeding to the international pressure also strengthened their strong-man image and appealed to their Sinhala-nationalist vote bank.

Similarly, the post-war economic recovery also ushered in much-needed confidence in the leadership and the government. Here again, China’s role had been crucial. Between 2005-2015, China emerged as Sri Lanka’s leading source of development assistance and FDI. As an economically recovering Sri Lanka proposed several mega infrastructure projects, China seized the opportunity to invest in these projects. This enthusiasm was a product of China’s growing economic strength and desire to be the next Asian power. On the other hand, Sri Lanka found it easier to seek assistance from China considering its quick disbursement of loans and lack of interest in Sri Lankan domestic politics. In most cases, China also provided technical, financial, and economic assistance to these projects.

Another crucial factor in the crisis has been Sri Lanka’s economic structure, mismanagement, and inexhaustive project proposals. Here too, China’s role has been critical. Beijing saw the investment opportunities as a means to entrench its influence and investments, while the Rajapaksas used this as an opportunity to reap political and economic benefits. As a result, the Sri Lankan leadership handpicked certain Chinese firms to invest in specific projects; signed abstract agreements; promoted opaque companies and investments; accepted loans with higher interest rates than those offered by the ADB or the World Bank. They also rejected and made it difficult for investments from India, Japan, and the US. In return, the Rajapaksa clan enjoyed China’s external support, benefited from their election campaign funding, and also expanded their coffers.

With this political support and elite capture, these Chinese-funded projects and finances cumulated with time. And by the time Rajapaksa’s successors took over in 2015, these Chinese investments and loans were so deeply embedded within the Sri Lankan economy that any kind of disconnect with China became unimaginable. Subsequently, the Chinese investments and projects continued to flow in Sri Lanka. The return of the Rajapaksas in 2019 further fast-tracked these investments and initiatives.