White elephants fuel fury over Sri Lanka’s debt crisis

To appreciate the challenges facing the new president of Sri Lanka, head to Hambantota.

At the end of the jungle stretch in the south of the island is a conference hall for 1,500 people, a cricket stadium with 35,000 seats, and a huge “international” airport. All are empty and rotting in the heat.

Infrastructure projects also include a $3.1 billion port that was funded by China and now controlled by Beijing after the Sri Lankan government suffered heavy losses and withdrew its funding in 2017.

Bound by a deserted four-lane highway, critics point to these projects as the pinnacle of wasteful spending by once dominant Rajapaksa clanwho took out large loans abroad to spend lavishly in their home region of only 600,000 people.

But unpaid debts and rising servicing costs also reflect the challenges Ranil Wickremesinghe faces as the new president prepares to push through painful reforms to secure IMF bailouts and restructure more than $50 billion in foreign debt.

“There is no fuel here, so I cycle 25km every day to get here,” said Bandar, 47, a retired soldier who guards the gate to the $20 million conference hall. The hulking concrete slab was built with a South Korean loan and opened by ex-president Mahinda Rajapaksa in 2013.

Sitting by a closed gate and an electric elephant-proof fence, Bandar told the Financial Times that he grew bananas, chili peppers and rice in his village to survive. Since the government banned fertilizer imports last year, its yields have fallen by more than two-thirds.

Taxiway at Mattala Rajapaksa International Airport in Sri Lanka
Several planes landed at Hambantota International Airport © Paula Bronstein/Getty Images

Mahinda’s younger brother, Gotabay Rajapaksa, was ousted from the presidency this month after fleeing the country amid widespread protests against soaring prices, fuel shortages and a plunging currency.

Sri LankaBeijing’s debt talks will be watched closely as a test of how Beijing is dealing with other creditors after large loans to developing countries in Asia and Africa, which are now struggling due to rising inflation and the consequences of the war in Ukraine.

Negotiations are delayed for several weeks due to unrest. The highly unpopular Wickremesinghe should prioritize restoring public order, experts say. But him decision to send troops The clean up site of the protest on Thursday evening sparked new protests in Colombo.

Nandalal Weerasinghe, the central bank governor, said the government should waste no time in pushing through “a few tax measures, a few cost-cutting measures and restructuring of state-owned enterprises.”

But Weerasingh warned in interview with Financial Times that reforming a loss-making state-owned electricity company, for example, would mean higher prices.

“I understand that it is difficult, but it must be done. The government has a responsibility to protect the poor and vulnerable who will be affected by all these policies,” he said.

Experts said that by the end of the year, about half of Sri Lankans will be classified as poor, a staggering change for an island of 22 million that was until recently considered an upper-middle-income country.

The central bank this month raised its constant lending rate by 100 basis points to 15.5% in an attempt to curb inflation at 55%.

Weerasingh added that the government should also reduce unnecessary public investment and stop importing goods such as televisions, cars and mobile phones in order to maintain hard currency for fuel imports.

People line up to fill their LPG tanks at a petrol station in Colombo.
People line up to fill LPG cylinders at a distribution point in Colombo. Sri Lanka is having trouble importing fuel © Arun Sankar/AFP/Getty Images

Painful reforms are a prerequisite for a $3 billion IMF bailout that will open up another $4 billion in World Bank and Asian Development Bank financing.

But the severity of the crisis means Sri Lanka is also seeking up to $1.5 billion from its biggest bilateral backers China, India and Japan in bridge financing to immediately resume fuel and gas imports.

“This should allow us to hold out for the next three to four months until the IMF package comes into effect,” Weerasinghe said.

Nishan de Mel, director of the Verité think tank in Colombo, urged the government to speed up debt talks. “Every month of delay kills economic functionality, and it doesn’t look like the government has the energy and attention it needs to get it to work fast,” he said.

In Hambantota, about 160 kilometers southeast of Colombo, the effects of the crisis are exemplified by a snaking line of cars waiting for gas stations that blocked the main entrance to the local chamber of commerce.

Inside, the head of the chamber, Tilar Nadugala, warned that small and medium-sized enterprises, an important source of employment in rural areas such as Hambantota, “will collapse in two to three months” if interest rates remain unchanged. This happened because “for people who took out loans for projects using floating rates, interest rates jumped from 12 percent to 25 percent,” he said.

The Hambantota Cricket Stadium has only hosted 27 games since it opened in 2011, he said, but “the conference room is even worse. At least you can play in the stadium. The center could host weddings or concerts, but the locals can’t afford to rent it out.”

The support of the Rajapaks, whose party still has a majority in parliament and has many connections in the region, has waned.

“I am very glad that Rajapaksa was kicked out. Whoever is in the government does not respect the law,” said tuk-tuk driver Amit Liyanedara.

Liyanedara waited in line for fuel for 18 days, slept in his car or on the side of the road because the buses stopped running. He said the projects are “theoretically good, but they don’t work properly and we don’t have medicine, fuel or fertilizer.”

He added that his pregnant wife and their one-year-old son only eat once a day.

When asked about his future, Liyanedara said that he could hardly imagine it. “For me, it’s the same thing every day,” he said. “I’m standing in line.”