A historian from the twenty-second century examining the first century of Sri Lanka’s post-independence history is likely to find the Rajapaksa family unique. They were the Kennedys of Sri Lanka, establishing the most powerful political dynasties of our time. That was for several obvious reasons. The Rajapaksa administration successfully concluded a thirty-year conflict that had effectively divided the nation. During their tenure, the country’s per capita GDP increased nearly fourfold, reaching an all-time high of $4,000. The country also witnessed an infrastructure boom. They were no small achievements. I am sure their worst critics would agree.
Having noted all that, the Rajapaksa administration also made several economic blunders. Many leaders stand out for their uniqueness. While it is common for most previous Sri Lankan leaders to make multiple poor decisions, it was the Rajapaksas that set a notable precedent. For instance, while numerous leaders can be blamed for money printing, the Rajapaksas took that to the next level.
Below is an analysis of some of the most consequential economic decisions made during the Rajapaksa tenure. They present ideal case studies on what not to do for any student of economics. Given the recent decline of their previously high popularity to near-zero levels, this is a pertinent moment to revisit and discuss these critical missteps.
01: Excessive Borrowing for Massive Infrastructure Projects
Under Mahinda Rajapaksa’s presidency, Sri Lanka embarked on numerous large-scale infrastructure projects, such as the Hambantota Port and Mattala Rajapaksa International Airport, funded mainly by high-interest-commercial loans from China. Many of these projects had low returns on investment, at least in the short term, leading to heavy debt burdens that later strained the country’s finances and created a long-term debt crisis.
Those who still hesitate to believe the above statement should immediately look at the patterns of amassing debt over the years, from the 1970s to the beginning of the crisis, as illustrated in Figure 1. Even the prolonged conflict did not primarily contribute to the nation’s status as a debtor. Except for the final three years of the war, the annual debt incurred during three decades of conflict did not exceed $1 billion. In stark contrast, from 2007 to 2014, the country consistently borrowed heavily each year, with an annual peak of $10 billion in 2012. The associated expenditures were not primarily for conflict-related purposes but for infrastructure projects. Some of these projects were necessary for the country but the bulk of the funds was directed towards initiatives with doubtful outcomes such as the Hambantota Port and Mattala Rajapaksa International Airport.
The rationale behind the Rajapaksa administration’s major investments in Hambantota-related projects remains unclear. It is difficult to comprehend how they could not have anticipated the outcomes. A more prudent approach than constructing an airport in the middle of nowhere would have been to allocate those funds towards building a second runway at Bandaranaike International Airport (BIA) in Katunayake, enhancing its potential as a South Asian hub. Similarly, the investment in Hambantota Port raises questions; could we not have directed part of that funding towards the development of the Colombo Port?
It is plausible that the Rajapaksas envisioned Hambantota, their former stronghold, as a potential second capital of Sri Lanka, or perhaps their motivations were driven by factors that remain unclear to us. Regrettably, recent election results indicate that even the residents of Hambantota no longer value these initiatives as they once did.
02: Gross Mismanagement of Agriculture
In 2021, the administration of President Gotabaya Rajapaksa implemented a sweeping ban on chemical fertilizers, aiming to make Sri Lanka the “world’s first fully organic farming nation”. The decision was made abruptly without a gradual transition plan to promote organic agriculture and reduce dependence on imported fertilizers. This sudden shift led to significant disruptions in agricultural productivity. Key staples such as rice and tea which are among Sri Lanka’s major exports and critical to its economy, experienced sharp declines in yield.
Rice production dropped by over 20% within the first growing season following the ban, impacting domestic food security and forcing the government to import rice to meet demand. The tea industry, which represents a significant portion of Sri Lanka’s foreign exchange earnings, also suffered as output fell, diminishing export revenues. Consequently, this policy intensified the strain on Sri Lanka’s economy, which was already grappling with high debt levels, reduced foreign reserves, and inflationary pressures. The decline in local food production led to soaring food prices, pushing more people into poverty and worsening the existing economic crisis. The fertilizer ban was eventually reversed in 2022, but the economic and social repercussions were long felt.
03: Mishandling of the National Carrier
SriLankan Airlines, once a respected and profitable national carrier, suffered under the leadership of the Rajapaksas, who made decisions that prioritized political gain over effective management. The government terminated a profitable partnership with Emirates in 2008, taking full control of the airline—a move that led to mounting operational inefficiencies, increased debt, and significant financial losses. The airline’s debt had soared into billions now, a burden passed onto taxpayers, some of them have not even set foot on an aircraft.
In parallel, the Rajapaksa government also launched Mihin Lanka in 2007 as a budget airline intended to serve destinations not covered by SriLankan Airlines. However, Mihin Lanka quickly became a symbol of mismanagement, with unprofitable routes, inefficient operations, and questionable financial practices. Despite accruing heavy losses and draining public funds, the government continued to fund Mihin Lanka until it finally shut down in 2016, merging with SriLankan Airlines. The combined financial impact of these ventures was devastating, further contributing to the broader economic instability in the country.
04: Centralizing Power with the Erosion of Checks and Balances
In addition to the economy, the political landscape in Sri Lanka has undergone significant changes under the administrations of Mahinda and Gotabaya Rajapaksa, particularly with the implementation of the 18th and 20th Amendments to the Constitution. These amendments have played a crucial role in consolidating power within the executive branch, undermining democratic governance and eroding the checks and balances essential for a healthy democracy.
The 18th Amendment, enacted in 2010, removed the two-term limit for the presidency and significantly reduced the powers of key independent institutions such as the Public Service Commission, the Election Commission, and the National Police Commission. This amendment allowed the President to make key public service appointments, including the Attorney General, Judges of the Supreme Court, and Judges of the Court of Appeal, removing checks and balances on the executive. The removal of these checks on executive power led to a concentration of authority in the hands of the President, which was seen as a move to strengthen the executive at the expense of democratic institutions.
The 20th Amendment, passed in October 2020, reversed many reforms introduced by the 19th Amendment in 2015, which aimed to decentralize power and strengthen democratic institutions. The 20th Amendment reinstated the President’s authority to make key appointments and gave the President control over the appointment of the Prime Minister and other ministers. This amendment was criticized for its bias towards the Rajapaksa family and was seen as a step towards authoritarianism.
The consolidation of power under the Rajapaksa administration has had significant implications for democratic governance in Sri Lanka. The erosion of checks and balances has led to a weakening of democratic institutions and a decline in accountability. The lack of independent oversight has allowed for the abuse of power and corruption, further undermining public trust in the government and institutions.
05: Militarization of Business
The militarization of business processes and ventures in Sri Lanka has been a significant and controversial development over the past two decades. Initially, the involvement of military forces in business activities began out of necessity, as many private enterprises were reluctant to operate in conflict-ridden areas. However, this practice soon expanded beyond its original scope.
The end of the civil war in 2009 saw the military involved in various economic activities such as agriculture, tourism, and infrastructure development. This period marked the beginning of what has been termed the “military business model,” where the military’s influence extended into civilian sectors.
The trend continued and intensified under Gotabaya Rajapaksa, with the appointment of former military officers to key positions in state-owned service organizations. This move was seen as a violation of the principle that separates the mandates of the military and business firms. The military’s involvement in business was not only a fiscal burden but also restricted civilian participation in the economy, particularly in areas dominated by the military.
06: Poor Fiscal Management: Ill-Advised Tax Cuts and Mishandling Reserves
In 2019, Gotabaya Rajapaksa’s administration implemented sweeping tax cuts, including dropping of PAYE tax and reducing the value-added tax (VAT) from 15% to 8%. This move drastically reduced already low government revenue, exacerbating the fiscal deficit. The tax cuts were intended to stimulate economic growth but had the opposite effect, leading to a significant shortfall in government funds. This shortfall hindered the government’s ability to invest in critical infrastructure and social services, further straining the economy.
Further, the administration failed to manage foreign reserves effectively. By 2020, Sri Lanka’s foreign reserves had dwindled to precariously low levels, falling from $7.6 billion in 2019 to just $2.3 billion by the end of 2021. This severe shortage of foreign currency made it increasingly difficult for the country to import essential goods and services, including fuel, food, and medicine. The lack of foreign reserves also led to a depreciation of the rupee, further exacerbating inflation and the cost of living for ordinary citizens.
The combination of ill-advised tax cuts and poor management of foreign reserves were key factors that contributed to the economic crisis Sri Lanka faced in 2022. This crisis highlighted the critical importance of sound fiscal management and the need for timely and effective economic reforms to ensure long-term stability and growth.
07: Ignoring Early Warnings of an Economic Crisis
This was the tipping point. The Rajapaksa administration’s handling of Sri Lanka’s economic crisis is a stark example of the consequences of ignoring early warnings. Despite clear signals of financial distress, the administration delayed negotiations with the IMF and failed to implement timely reforms.
The reluctance to engage with the IMF and implement reforms deepened the crisis. By the time negotiations began in earnest, the situation had deteriorated significantly. In April 2022, Sri Lanka defaulted on its debt for the first time with foreign reserves plummeting to just $25 million. The delay in addressing the crisis only worsened the economic situation and eroded public trust in the government’s ability to manage the economy effectively. The rest, as they say, is history.
Should Namal Rajapaksa, the current leader of the political movement commonly referred to as “Pohottuwa,” come across this message, there are numerous lessons to be gleaned. Exercising caution is imperative to avoid repeating the errors of his father and uncle.
Chanuka Wattegama [email protected] is a policy researcher. The ideas expressed are personal.