By Ruth Pollard

The island nation of 22 million people is facing its worst economic upheaval in a decade. From an ill-fated fertilizer ban that led to a dramatic fall in yields of crops like rice and tea, to its failure to deal with a foreign-currency crisis that’s now a humanitarian emergency, the government of President Gotabaya Rajapaksa is fast running out of solutions. Relying until now on help from its two major backers — India and China — and stubbornly refusing wider international aid, the country is on the verge of default.

Protests roiled Colombo on Tuesday (15), with upwards of 10,000 opposition supporters gathering outside the president’s office to call for his resignation. Shortages of electricity, fuel, food and medicine are widespread and causing real pain for everyone from daily wage earners to operators trying to jumpstart the key tourism industry after two years of Covid interruptions and the 2019 Easter Sunday bombings that targeted churches and luxury hotels, killing nearly 270 people. Inflation has soared to 15% — the worst in Asia.

It’s hard to overstate the influence of the Rajapaksa clan in all this. Gotabaya, who won office in the November 2019 presidential elections, appointed his brother, Mahinda, as prime minister. If this pairing sounds familiar, it’s because it is. Mahinda first came to power in 2004, initially as prime minister and then as president. At the time, Gotabaya was defence secretary and was notorious for his role in the 2009 operation to end the civil war with Tamil rebels. Thousands died or disappeared amid allegations of torture, rape, extra-judicial killings and the abduction and assassination of Tamil separatists, journalists and opposition figures. Gotabaya denies all these allegations.

The Rajapaksas were out of power briefly from 2015, when Maithripala Sirisena and Ranil Wickremesinghe led the country, until Wickremesinghe was removed from his post in 2018, sparking a constitutional crisis. Their party won a landslide victory in the August 2020 general election, and quickly restored sweeping executive powers to the presidency that had been previously curbed. Another brother, Basil, was appointed finance minister in July 2021. He was already a controversial figure due to his American-Sri Lankan nationality — his entry into Parliament was only made possible when the government removed a constitutional provision barring dual citizens.

Their eldest brother, Chamal, is a Cabinet minister, while his son is a non-Cabinet minister. One of the prime minister’s sons is also in the Cabinet, another is his chief of staff, and a nephew is a Member of Parliament. According to some estimates, about 75% of the budget is under the control of Rajapaksa ministers in government. It is dynastic politics at its purest.

But all the Rajapaksas in power haven’t been able to do what needed to be done to help Sri Lanka out of this mess.

Basil was in India March 16-17, where he secured a $1 billion credit line to help stave off the crisis, exacerbated by spikes in oil prices driven by Russia’s invasion of Ukraine. The war is also badly affecting the travel sector: About 30% of visitors so far this year were from Russia, Ukraine, Poland and Belarus, while Russia is also one of the biggest buyers of Sri Lankan tea, its main goods export.

Things are bad enough that the brothers’ resistance to seeking support from the International Monetary Fund (IMF) is softening. Sri Lankan officials began talks with the IMF last Monday (14) and may present policy proposals by early next month.

Authorities have recently allowed the rupee to weaken and borrowing costs to rise, in line with expectations of IMF conditions. But experts have criticized the sequencing of these moves. Debt restructuring was the first priority, said economist and executive director of the Colombo-based Verité Research, Nishan de Mel, told me. Increasing interest rates and depreciating the rupee should have come next.

The situation has snowballed because it was mismanaged for some time, de Mel said. What Sri Lankans are facing now is unprecedented, he said, and beyond anything experienced during the decades of civil war. Sri Lanka has about $2 billion of foreign-currency reserves against total debt repayment of as much as $7 billion for 2022, including a $1 billion dollar bond maturing in July. It has three months, maybe less, before a default, de Mel said.

There is now a growing demand for the government to clearly articulate some concrete solutions, said Dushni Weerakoon, executive director of the Institute of Policy Studies of Sri Lanka. “There is no painless way out of this,” Weerakoon noted. “The economic conditions will tighten before they get better.”

It all began with the government’s capital market borrowing back in 2007, she said. (Mahinda was president then.) That now accounts for 38% of the country’s foreign debt, while loans from China accounted for 10%. Given the severity of Sri Lanka’s plight, the initial reliance on government-to-government deals to finance the foreign exchange gap hasn’t been sufficient, she said. Approaching the IMF is now the best option, complemented by efforts to access financing from India and China.

Sri Lanka has asked both Beijing and New Delhi to consider restructuring its debt repayments after India in January extended a $400 million swap line and deferred an Asian Clearing Union settlement of $500 million.

The country is also seeking to negotiate a new loan with China. The Hambantota port — part of China’s Belt and Road Initiative — is widely viewed as an example of what can go wrong with Beijing’s infrastructure drive. Sri Lanka borrowed heavily to build the port, couldn’t repay the loans, and then gave China a 99-year lease for debt relief.

Gotabaya is hardly the unifying figure Sri Lanka needs right now. However, with a two-thirds majority in Parliament and elections not due until 2024 and 2025, the opposition protests are unlikely to loosen the family’s grip on power.

He addressed the nation Wednesday (16) evening, vowing to work with the IMF to resolve the crisis and saying he was “sensitive to the many sufferings the people have had to experience over the past two months.” But the clock is ticking and people are angry — and hungry. Any delay in an agreement with the IMF brings the country one step closer to a hard default. And that is a road no one wants Sri Lanka to travel.

-Ruth Pollard is a columnist and editor with Bloomberg Opinion where this article was originally featured