Why Sri Lanka Collapsed And Why Kenya Might Be Next

Sri Lankan economy collapsed. This article explores the reasons for its collapse and why Kenya might follow suit.

Sri Lanka’s Prime Minister and President agreed to quit office amid the tension arising from protesters. The country’s debt-laden economy has collapsed, running out of budget to purchase food and fuel.

The citizens are queuing in long lines to buy fuel and skipping meals due to shortages.

The government is also short on cash to import necessities. In addition to defaulting on its loan, Sri Lanka is looking at countries like China and India, and the International Monetary Fund to bail her out.

Sri Lanka joins Lebanon, Zambia, Belize, Argentina, and Suriname in the list of countries that have defaulted on their debt obligations. And Kenya might be next in line.

The Rajapaksa Way

The current crisis directly points to Gotabaya Rajapaksa, the former president, and his family’s actions. He had his brothers, Mahinda Rajapaksa and Basil Rajapaksa as the former Prime Minister and former Finance Minister, respectively. 

The former president took power in 2019. When his party, the Sri Lanka People’s Front (SLPF), solidified its super-majority in parliament, it gave President Gotabaya unprecedented power.

The unchecked power was also contributed by his passing of the 20th Amendment.

Former President Gotabaya had dictatorial tendencies, characterized by corruption, nepotism, human rights violations, and military officers’ elevation. The debt burden began when the president took massive external loans to pay for the war budget at the end of the civil war. 

The loans were also to fund flashy infrastructure projects to boost the country’s tourism and reward friends and family. Gotabaya then turned to Chinese lenders when the heat became more intense. This was because the country already had a constricted foreign reserve.

Instead of reinforcing strategic economic reforms to turn around the country’s situation, Gotabya put in place multiple tax cuts to sure up his political influence.

The tax cuts were only reversed when creditors began downgrading the country’s ratings, which denied the government borrowing advantage.

The country’s economy collapsed in 2021, amid the pandemic, due to his terrible administration and squandering of Sri Lanka’s wealth.

Apart from the pandemic and other external shocks, the economic downturn was influenced by the former president’s reluctance to seek help from IMF. 

Despite the 2019 Easter bombings and the pandemic sabotaging Sri Lanka’s main source of foreign revenue–tourism, Gotabaya went ahead to ban chemical fertilizers that promoted the country’s main export crop– the tea industry.

The chemical ban, which was later reinstated, and the global grain deficit– triggered by the Ukraine-Russia war left the country struggling with food insecurity.

How Serious the Crisis is

In essence, Sri Lanka is in a $51 billion debt that it has defaulted. Tourism, its main source of foreign income, has also stumbled due to the 2019 terror attack that claimed over 260 lives and the worldwide Coronavirus pandemic that has threatened traveling. 

Sri Lanka’s notes no longer hold much value

In addition, Sri Lanka’s currency has so far lost its financial value by 80%, which worsens the inflation that has already plagued the entire world and makes the importation of necessities impossible.

UN data shows that food costs have risen to 81%. This has left a country threatened with bankruptcy, with barely any funds to purchase or import essentials like gasoline, cooking gas, milk, and toilet paper.

Furthermore, power outages intended to cut fuel and energy costs also affected school-going children. 

The protests in Colombo, Sri Lanka’s capital, have become more violent. The protests began in April 2022, calling for Gotabaya to resign.

Instead, his brother, PM Mahinda Rajapaksa, stepped down, and PM Ranil Wickremesinghe took over. Prime Minister Ranil, however, complained of the monumental burden of reviving an economy that was diving head-first to its collapse.

The protesters stormed PM Ranil’s and Gotabaya’s residences and set one of the properties on fire. Doctors also took to social media to criticize the government’s incompetence in supplying medical equipment and medicine to hospitals.

The socio-economic upheaval has forced Sri Lankans to look for passports to find greener pastures overseas. The situation has been so serious that the government granted its employees a three-month leave to grow their own foods.

A Foreshadowing for Kenya

The crisis that has befallen Sri Lanka is probably an ominous foreshadowing of what may be in store for Kenya. Before defaulting on debt repayment,  Lebanon, Zambia, Belize, Argentina, Sri Lanka, and Suriname were fast-growing economies in their territories. 

Currently, their citizens are in economic turmoil, with businesses collapsing, the unemployment rate rising, and food prices skyrocketing.

Kenya may as well be on the same route. For a start, Kenya’s inflation rate was reported to be 7.9% in June, up from 6.47% in April– similar to Sri Lanka’s situation in August 2021 before the protests began.

The rising living costs have affected both businesses in post-Covid pandemic recovery and households struggling to husband their resources while saving to scale up the socio-economic ladder.

The National Treasury and the government’s reassurance speeches have not tamed the situation. Indicators place Kenya on the brink of a debt crisis never experienced before. 

For instance, out of the Sh1.3 trillion consolidated fund, Kenya used Sh1.1 trillion on debt repayment in the first half of the financial year 2021/2022. This translates to fewer funds available for development and recurrent expenditure, pushing the National Treasury to seek more external loans to settle wages and salaries.

Furthermore, the National Treasury falsified budgetary expenditure for the 2020/2021 financial year by backdating Sh165 billion.

After the financial year ended, the IMF and a sovereign bond made the disbursement to county governments and ministries. This is a clear indication that the government has gone broke.

This occurred around the same time KRA disclosed an over Sh60 billion surplus revenue collection, the first in a decade.

The current public debt stands at Sh8.4 trillion, with Sh4.2 trillion foreign and internal debt. With the government expected to make a Sh. 1 trillion repayments in the current financial year, Kenya should tread carefully not to join the list of defaulters.

Looking Ahead

Defaulting on debt repayments often deters foreign direct investments in a country. It also threatens to devalue a country’s national currency. These make it difficult to make any future borrowing. The debt distress spreads beyond the cries of Sri Lanka protesters, as the risk is on a global rise.