By Matthew Campbell

The central highlands of Sri Lanka are tea country. Lush plantations climb the hillsides, and trucks loaded with 40-kilogram (88-pound) bales of tea leaves clatter down winding roads, bound for the port of Colombo.

But during a recent visit to the Geragama tea estate on the outskirts of Kandy, Sri Lanka’s second city, few bales were going out. The country is experiencing one of the most severe economic meltdowns to strike any nation in decades, and like virtually every business, Geragama was struggling to obtain basic materials. The price of fertilizer had gone up nine fold since 2019, while electricity shortages forced it to rely on a generator for at least a few hours each day.

Geragama had cut the number of workers for each shift at its processing plant in half, to 15, and their wages were being devalued by galloping inflation. Dawatapola Watte Irangani, a 68-year-old labourer, explained as she tended to a drying kiln that, with energy prices soaring, she could no longer afford to cook at home with gas, as she had for decades. Instead, Irangani, who has a deeply lined face and leathery, muscular hands, cut down a tree in her garden to produce firewood that sent smoke billowing through her house. When that ran out, she foraged for more in the jungle. “I don’t remember a time this difficult,” she said.

A widow, Irangani is the sole breadwinner for her household, including two grandchildren she’s cared for since the death of her son. “I worry a lot about their future,” she said, “and whether they’ll have jobs when they grow up.”

Stories like Irangani’s have become shockingly common in Sri Lanka. Only three years ago the World Bank classified its economy as upper middle-income, in the same category as Brazil and Turkey. On health metrics such as life expectancy, it was comparable to China or Poland. Today the United Nations estimates that as many as 7 million of its 22 million people require urgent humanitarian assistance, with many at risk of malnutrition.

The depth of the Sri Lankan collapse has been stunning. Like many developing economies, it relies on imports of food, fuel and fertilizer. Russia’s invasion of Ukraine has constrained supplies and substantially raised the prices of all three, compounded by the surge in value of the US dollar, the currency required to buy these commodities. Gasoline and diesel are being strictly rationed, and anyone who needs more than their weekly allocation must buy it from black-market traders, who fill up cars from jerrycans at two to three times the official price.

But global trends were just the spark for an economic tinderbox that’s been growing more dangerous in Sri Lanka for more than a decade. For all but about five years since 2005, the country has been ruled by the Rajapaksa family, a sprawling political clan that has variously occupied the offices of the president, prime minister, finance minister and defence secretary. Spurning traditional allies in India and the US, the Rajapaksas reoriented Sri Lanka’s foreign and economic policy toward China and borrowed from its state lenders to pay for lavish infrastructure projects. They also ushered in what critics say was an era of operatic corruption, with billions of dollars in public funds siphoned off and secreted abroad.

This year, Sri Lankans pushed back, staging massive street protests against the family’s rule. Prime Minister Mahinda Rajapaksa, who also served as president from 2005 to 2015, resigned in May, and his younger brother, President Gotabaya Rajapaksa, did the same in July after a mob stormed his official residence. Gotabaya fled to Singapore but returned to Sri Lanka in September, and Colombo buzzes with rumours that the Rajapaksas, who retain loyalists across the government, are plotting a return to power. They declined requests to be interviewed for this story.

For now, a caretaker government is trying to contain the economic fallout. Sri Lanka is in talks to restructure its more than $40 billion in foreign debt and expects to reach an agreement with the International Monetary Fund (IMF) on a bailout by early next year. That may not help ordinary citizens in the near term, however. “One by one, small industry, medium-scale industry is being closed down. Food prices are going up to three times 2019 figures,” says Patali Champika Ranawaka, the chairman of the Sri Lankan Parliament’s committee on economic stabilization. “The worst things are yet to come.”
A lawyer and Member of Parliament (MP) from Sri Lanka’s rural south, Mahinda Rajapaksa was elected to the presidency in 2005, during a brutal civil conflict that was already in its third decade. The two sides—the central government and the Liberation Tigers of Tamil Eelam (LTTE), who sought an independent state for Sri Lanka’s marginalized Tamil minority—killed civilians, tortured prisoners and assassinated enemy commanders. In the 1980s and ’90s the LTTE, better known abroad as the Tamil Tigers, pioneered the use of suicide bombings as a guerrilla tactic.

To end the fighting, Mahinda turned to his brother Gotabaya, a long-time army officer who’d emigrated to California. In what was surely one of the most radical career changes in Los Angeles history, Gotabaya left his job as an IT administrator to return to Sri Lanka as secretary of defence. He oversaw a series of relentless offensives against the LTTE, forcing its fighters into ever-smaller patches of territory. According to a UN report, as many as 40,000 civilians may have been killed in the process, in some cases from shelling in what the government had claimed were no-fire zones. The LTTE effectively surrendered in May 2009, after the death of its leader, Velupillai Prabhakaran.

Finally at peace, Sri Lanka was open for business. For Mahinda, Gotabaya and their brother Basil, who became minister of economic development, this meant seeking investment from China rather than democratic countries such as India, the regional superpower. According to a former government official who asked not to be identified because of fears of retaliation, Indian leaders repeatedly voiced their displeasure about this development in private meetings. But China had emerged from the global financial crisis stronger than ever, and its infrastructure-led development model had obvious appeal for a country that needed to rebuild.

The Rajapaksas’ flagship proposal was a pair of major infrastructure projects—a giant marine terminal and an international airport in the southern district of Hambantota. The area was remote and underdeveloped, with families of elephants roaming its sunbaked plains. But it had a key advantage: It was the Rajapaksas’ ancestral home and electoral stronghold. Both projects, along with an expressway connecting them to Colombo, went ahead, funded largely by borrowing from China, and their costs ballooned.

The expected price of the airport in 2006, when it was still in the early stages of design, was $60 million to $70 million, according to a US Department of State cable later made public by WikiLeaks. By the time it opened in 2013, it cost $244 million, three-quarters from a Chinese loan. Virtually no airlines wanted to serve Hambantota, and it was so quiet that some of the traffic on its taxiways came from peacocks busting through the perimeter.

The seaport didn’t fare much better. China extended $1.3 billion in loans for the project, which, like the airport, was built by Chinese construction companies. It was obvious the costs were hugely inflated, according to a foreign diplomat who worked on infrastructure matters in Colombo. But the Rajapaksa government was happy to proceed, feeding what the diplomat describes as a “perception that the Chinese were rather adept at spreading the manure.” The result: an underused terminal whose total revenue in 2014 amounted to $9 million.

Graft infected government business of all kinds. In 2010 state-controlled SriLankan Airlines (SLA) began examining options to replace its ageing planes. According to a later official inquiry, executives originally proposed a “staggered” acquisition, to keep costs manageable. The following year the government installed a new chief executive officer, Kapila Chandrasena, who’d previously run a smaller airline set up by the Rajapaksa administration. He joined a new chairman, Nishantha Wickramasinghe—Mahinda Rajapaksa’s brother-in-law.

SLA’s procurement strategy soon turned aggressive, calling for the company to spend $2.3 billion on at least 11 new Airbus widebodies. According to a UK court filing, as Airbus staff negotiated the sale they learned that a third-party consultant named Priyanka Neomali Wijenayake would be involved. British investigators would later note that Wijenayake had “no aerospace expertise,” but she did happen to be married to Chandrasena, SLA’s CEO.

In 2013, Airbus and Wijenayake made a deal: For each plane successfully delivered, her company would receive a payment from Airbus of $1 million or more, plus a one-time $5 million award if SLA refrained from buying aircraft from archrival Boeing Co.—for a total of almost $17 million. Ultimately the carrier took delivery of only seven of the planes it originally sought, and Wijenayake’s company received only $2 million. The deal later became one of the subjects of a joint investigation by the US, the UK and France into Airbus’s use of “agents” to secure sales around the world. As part of a 2020 deferred prosecution agreement with British authorities, Airbus admitted to entering into a consulting deal with Wijenayake and to paying her. She and her husband denied wrongdoing.

Efforts to bring corruption to light in Sri Lanka sometimes proved hazardous. Lasantha Wickrematunge, editor of a weekly paper called the Sunday Leader, led one such investigation, into a deal by the Sri Lankan air force to buy fighter jets from Ukraine. The paper reported that a company that was supposed to receive $15 million for the planes didn’t appear to exist—and suggested that Gotabaya Rajapaksa had been involved in embezzling some of the funds. Gotabaya denied the allegations and sued for defamation. Wickrematunge refused to back down, even after someone delivered to him a funeral wreath and a newspaper dipped in red paint. On it was scrawled ‘If you write, you will be killed’. Not long afterward, in January 2009, a group of black-clad men on motorcycles surrounded Wickrematunge’s car at a crowded intersection. They smashed the windows, then struck his head with a sharp object, puncturing his skull. He died later that day.

None of this seemed to dent Mahinda Rajapaksa’s popularity, particularly among Sri Lanka’s Sinhalese majority. His family enjoyed considerable legitimacy from its role in ending the civil war, and Chinese investment and increased tourism had touched off an economic boom across much of the country. New luxury hotels crowded the white-sand beaches of the south and west coasts, and celebrities flocked to the island for five-star honeymoons. In Colombo, traditionally a sleepy city of narrow lanes and low-slung bungalows, developers from China announced plans for malls and skyscrapers that wouldn’t be out of place in Shenzhen. From 2009 through 2014, gross domestic product climbed almost 90%.

Given Rajapaksa’s stature, political observers were surprised when the opposition candidate, Maithripala Sirisena, won a narrow victory in 2015’s presidential election. During his campaign, Sirisena had promised to rebuild ties to countries such as India and Japan and had warned that the Rajapaksas’ heavy borrowing from China and other lenders could turn Sri Lankans into “slaves”.

One of the first priorities for Sirisena’s government was to recover pilfered assets, which one senior official publicly claimed could amount to $18 billion. Yet according to a person involved with asset-tracing efforts, Sri Lanka had almost no ability to carry out complex financial investigations, and government agencies were stocked with Rajapaksa loyalists. One former official recalled how when he arrived at his new job, in an important financial body, he found its lower ranks swelled with employees from the family heartland in Sri Lanka’s deep south. Officials tried to train corruption specialists, while also seeking help from the US, which sent investigators to Colombo to gather information. But agencies such as the FBI, two people familiar with the matter say, were reluctant to share information, fearing it would leak to the Rajapaksas. The largest chunk of ill-gotten funds was believed to be in Dubai. Yet according to one of the people, authorities in the United Arab Emirates dragged their feet on turning over the requested records, ultimately providing nothing of substance. (In a statement to Bloomberg Businessweek, an Emirati official said that Sri Lanka had failed to provide “information required by UAE authorities” to process its requests and that the UAE “stands ready to assist” with future inquiries.)

Meanwhile, the Rajapaksas were nearing a return. Their moment of opportunity arrived on Easter Sunday 2019, when suicide bombers carried out coordinated attacks at churches and hotels around Colombo. The explosions, in which 269 people were killed, were set off by an Islamist group. With national attention focused on security, an issue on which the Rajapaksas had ample credibility, Gotabaya declared his intention to stand for the presidency. (Mahinda was blocked from doing so by term limit rules.) He won a comfortable victory in elections held that November, then appointed Mahinda as prime minister and finance minister and gave another brother, Chamal, an economic portfolio. Eventually, Mahinda’s son Namal was appointed minister of sports and youth affairs, and Basil succeeded Mahinda as finance minister.

Once again, government in Sri Lanka was a family business.

The Southern Expressway begins near Sri Lanka’s west coast, in the Colombo suburbs, paralleling the shoreline southward in a rough quarter-circle. Pristinely paved, with US-style service stations and, in its farther reaches, electrified fencing to deter wandering elephants, the road is nothing like the narrow and twisting thoroughfares that link most Sri Lankan towns. Its construction was supposed to transform transportation in the region, allowing easier commutes and helping farmers and factories bring goods quickly to buyers.

During a drive to the deep south in mid-October, the expressway was almost empty; fuel shortages and toll costs have put long journeys out of reach for many drivers. The road ends in Hambantota, in view of the Chinese-built cranes of the new port. The facility has been controlled since 2017 by China Merchants Port Holdings, a state maritime company based in Hong Kong, which paid the Sri Lankan government $1.12 billion for a 99-year lease. US military strategists said they feared the deal could create a foothold for the Chinese navy, and a person familiar with the matter says American diplomats lobbied against it furiously. Left with few options for raising cash after the Rajapaksa years, the Sirisena government went ahead anyway.

Successive Sri Lankan leaders have said they won’t allow Hambantota to be a base for any foreign military, and for now it remains a commercial port—a quiet one. It certainly hasn’t brought prosperity to the area. Outside the local hospital, R.M. Lakmali Perera was selling lottery tickets and medical masks in a stall built of sheet metal. Until recently, she explained, her husband had earned a decent income as a bus conductor. But his shifts had been cut because of the lack of diesel, and Perera’s earnings, about 700 rupees ($1.91) a day, were now their main income. “It’s never enough,” she said. Food had become so expensive that she could afford to give her two teenage daughters only two meals a day. Perera was eating just one, with whatever was left over. “I’m so angry, but what is there to do?” she asked.

The chain of events that led most directly to Sri Lanka’s financial distress began right after Gotabaya Rajapaksa assumed the presidency in late 2019. His first major policy initiative was a package of sweeping tax cuts, including an almost 50% reduction in sales tax. Billed as a stimulus measure, the changes eliminated as much as a third of government revenue. Sri Lanka made up the gap with more borrowing, which it attempted to fund, in turn, by the central bank printing money.

Economic experts were flabbergasted. Harsha de Silva, an economist and opposition MP, suggests that the Rajapaksas were convinced by “a wrong interpretation of Modern Monetary Theory”—a philosophy holding that governments can spend liberally without fear because it’s always possible to create more money. But even MMT’s advocates don’t call for applying it beyond “monetarily sovereign” countries such as the US, which can easily sell debt in their own currency. In Sri Lanka the predictable result was a series of downgrades by rating agencies, making the dollar-denominated debt it needed for imports more expensive. What’s more, the pandemic arrived to devastate one of the country’s primary sources of foreign exchange: tourism. After accounting for about $3.7 billion annually from 2015 through 2019, on average, tourism earnings tumbled in 2020 to less than $700 million.
In April of the following year, Gotabaya announced an even more startling change: an immediate ban on imports of chemical fertilizer. The stated goal was to catalyze a national switch to organic farming, but more immediate financial pressures were also part of the story. Sri Lanka was looking at an outlay of as much as $400 million for 2021 fertilizer imports, requiring dollars it increasingly didn’t have.

The effects were devastating. Crop yields plunged, including on tea plantations, whose exports another key source of hard currency for Sri Lanka. Senthil Thondaman, president of the Ceylon Workers Congress, a political party representing plantation employees, says he warned Gotabaya that the sector couldn’t transition to organic agriculture overnight. “I told him, ‘I’m a practical man. I know what’s possible and not possible,’ ” he says. But the president “never took into consideration that this industry might crash.”

In April, Danish Ali, an Australian-educated Sri Lankan who works as a consultant to students on foreign visa applications, joined the growing crowd on Galle Face Green, a rectangular lawn in the heart of Colombo where some were pitching tents for a long-term occupation. Economic conditions had grown dire. Foreign-currency reserves were down to $50 million, from $7.6 billion at the end of 2019, making it impossible to import everything from medicine to coal. Electricity was being cut for as long as 12 hours a day, and some gas station lines were so long there were reports of people dying while waiting.

Ali’s business was suffering, too. Attending university overseas, relatively common during Sri Lanka’s boom years, had become an impossibility for all but the most privileged, leaving Ali badly short of clients. And it was growing harder to serve the ones he still had. He didn’t have a generator, and when the power went out, he had to hope his laptop and phone had enough juice to get him through the workday.

The protesters on Galle Face had gathered to make a simple demand, expressed with the Instagram-friendly hashtag #GotaGoHome. More broadly, Ali says, they wanted to express their anger at a political system “set up to corrupt, to make money for politicians and the people who work for them.” At first the atmosphere was festive. Then, about a month in, a group of pro-government counter-protesters, some carrying knives and clubs, approached the camp. Witnesses reported that police appeared to step aside to let them through. “They attacked us,” Ali says, “and the people gave a real answer.” Demonstrators fought back, clashing with police and torching homes owned by the Rajapaksas and their allies. Nine people were killed. The ensuing nationwide anger was too much even for Sri Lanka’s ruling family. Mahinda stepped down as prime minister immediately. Gotabaya held out until July, when a crowd burst through the gates of his official residence. As images of protesters swimming in the presidential pool were broadcast around the world, he announced his intent to resign.

The Sri Lankan government is now led by President Ranil Wickremesinghe, a political veteran with a reputation for blandly technocratic competence. His administration faces some titanic challenges. Sri Lanka suspended payments on foreign debt in April, triggering the first sovereign default in its history. It’s now in restructuring negotiations with its creditors: a mix of foreign governments including China, India and Japan, as well as investors who hold its sovereign bonds. Securing a fair agreement with China, which accounts for 52% of Sri Lanka’s bilateral debt, could prove to be the most challenging problem. “The signals are that China is ready to support Sri Lanka,” says Nandalal Weerasinghe, the governor of Sri Lanka’s central bank. But in restructuring talks with other debtors, China has been extremely reluctant to accept reductions in the total to be paid back, preferring to offer refinancing or extended repayment timelines. Sri Lanka’s other creditors, whether private investors or governments, will resist a deal offering less favourable terms than China receives.

A resolution that clarifies Sri Lanka’s financial position will be essential to unlock a bailout from the IMF, the next phase in restoring stability. The country and the fund have already agreed in principle to the terms, which include a $2.9 billion loan. The IMF’s board must now approve the agreement, which could happen early next year. The fund’s imprimatur would allow Sri Lanka to begin borrowing money from other international lenders again.

Policymakers are keen to emphasize that a bailout is only an initial step. To really end its current crisis and prevent future ones, Sri Lanka will have to make some fundamental changes—cutting spending, raising taxes, reining in graft. On the last item, the early signs aren’t encouraging. In a recent letter to President Wickremesinghe’s office, Ranawaka, the MP who chairs the economic stabilization committee, pointed out a curious trend. When striking agreements to procure gasoline and diesel early in 2022, the Rajapaksa government paid a premium—the difference between the wholesale price of a given oil product and the final amount charged—of $3 to $6 per barrel. But in July and August shipments, the premium soared to $25 or more a barrel. It’s not clear what accounts for the increase or who might be benefiting from it.

Meanwhile, the Rajapaksas aren’t far from the stage. Since Gotabaya’s departure, the family’s public face has been Mahinda’s son Namal, a 36-year-old with an informal manner and an active Twitter profile. The relevant comparison may be to the Marcos clan in the Philippines. Dictator Ferdinand Marcos fled the country in 1986, after a popular uprising against the corruption and impunity that defined his rule. But his successors failed to deliver real change, and voters came to see the disgraced leader in a more positive light. This year his son Bongbong was elected president.

As their collapsed economy grinds into 2023, Sri Lankans are being forced to contemplate problems more commonly associated with the world’s poorest nations. “We have a new emergency of food security and malnutrition, which is going to have lasting impacts on the productivity of our workforce,” says Anushka Wijesinha, CEO of the Centre for a Smart Future, a think tank in Colombo. “There is going to be scarring, in terms of education and malnutrition, for a very long time.” This pain could also cause a new eruption of popular protest, especially if tax increases and spending cuts fall hardest on the bottom of society. Whereas the #GotaGoHome movement was led by the relatively prosperous—people who, Wijesinha says, had felt “a very immediate hit to their lifestyle”—the next wave of unrest might be driven by the desperate poor.

It’s hard to imagine how things could get worse for many of them. M.G. Sagara, a farmer, grows rice and vegetables on his 1.5-acre plot, not far from the road linking Colombo to Kandy. Before the 2021 fertilizer ban, Sagara says, “we were very comfortable.” He grew enough to feed his wife and three children, with whom he shares a tin-roofed house by the edge of his vegetable garden, and to earn extra cash by selling the surplus.

Although Gotabaya’s government relaxed the prohibition on chemical fertilizer after several months, only a trickle is entering the country, and high prices put it out of reach for small-scale farmers. On his nearby paddy, Sagara says his rice plants would normally be about 3 feet high. Instead the scraggly stalks reached perhaps a foot off the ground. He’d shifted to selling firewood gathered by hand in the nearby jungle. “I have no experience to do another job,” he says. “I have to survive.”

Sagara and his wife had gone fully vegetarian, stopped buying milk powder and cut back to two meals a day. He was most upset by the effect the crisis was having on his children’s education. His middle son—a handsome 12-year-old who hung around as Sagara spoke, wearing only a pair of green checked shorts—was preparing to take an exam that could win him a scholarship. But the family could no longer afford tutoring. At one point, Sagara says, growing visibly emotional, the boy had suggested that he join a monastery so his parents wouldn’t have to worry about feeding him.

Sagara emphasized that he didn’t want to criticize any specific leader. But he was clear about who he thought deserved blame for what had happened to him and his family: “Politicians did this to our country.”

-Bloomberg