Mahinda Rajapakse launched his second six-year term in 2010 promising to turn Sri Lanka into the “wonder of Asia” by doubling GDP per capita income to $4,000 by 2014.
After the end of the island’s civil war in 2009, brought about by an army onslaught that is dogged by war crime allegations, Sri Lanka reaped a peace dividend that has seen some of the fastest development in Asia.
But now, less than three years later, the government must tackle a ballooning trade deficit, a falling currency, and discontent about rising living costs after huge hikes in fuel and electricity prices.
“Right now our problem is the trade deficit,” Sri Lanka’s Economic Development Minister Basil Rajapakse said last week. “In fact, I would say it is our only problem.”
The government has allowed the rupee to depreciate and slapped credit ceilings on commercial banks to discourage loans that could fuel further imports.
Last year’s trade deficit hit nearly $10 billion, or a fifth of the country’s GDP, imposing a massive strain on the country’s dwindling foreign reserves and hurting the island’s credit-worthiness.
Rajapakse’s former Foreign Minister Mangala Samaraweera accuses the administration of “mismanagement and corruption” for the economic woes, which has seen the currency weaken 10 percent against the dollar this year.
“The looming economic crisis is not something that happened suddenly,” says Samaraweera, an MP from the opposition United National Party. “It’s the result of mismanagement and corruption in the past five to six years.”
The Colombo Stock Exchange, which doubled in value in 2010 and was Asia’s best performer, has slid this year, shedding 10 percent of its value.
Sri Lanka’s former central bank deputy governor W. A. Wijewardena believes the economy is in trouble despite an official 7.2 percent growth forecast for 2012.
He says the balance of payments issue will have a knock-on effect on Sri Lanka’s ability to service its large commercially raised foreign debt, the value of the local currency and domestic prices.
Sri Lanka needs to borrow heavily to finance the trade deficit and repay debt, which could push the country into a vicious debt cycle, experts warn. The government has insisted, however, that it does not risk a sovereign default.
The government raised fuel prices by up to 49 percent and electricity by 40 percent last month, blaming the move on surging global crude prices.
Several public demonstrations against the rising living costs in the island’s south last month were brutally put down by police, with at least one demonstrator killed during anti-government riots.
The need for increasing prices “had been felt by the economy for a long time and the problem had accumulated to an explosive level,” Wijewardena said.
The Center for Policy Alternatives, a think tank in Colombo, says the government is likely to try to mask domestic economic problems with anti-Western rhetoric.
“The government has already organized anti-Western demonstrations to divert attention,” said the center’s director, Paikiasothy Saravanamuttu. “But they won’t be able to do it for long because people are feeling the pinch.”