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Sri Lanka: Economic Crisis Puts Rights in Peril

Urgently Address Social Safety Net, Taxation, High-Level Corruption

Women wait near an empty fuel station hoping to buy kerosene oil for cooking in Colombo, Sri Lanka, May 26, 2022. © 2022 AP Photo/Eranga Jayawardena

(New York) – Sri Lanka’s economic crisis is driving millions of people into poverty, jeopardizing their rights to health, education, and an adequate standard of living, Human Rights Watch said today. The Sri Lankan government should work with relevant financial institutions and partners to establish a new social protection system and obtain debt relief, adopt measures to ensure fair taxation, and address corruption at the highest levels of government.

Large-scale protests against economic mismanagement, corruption, and human rights abuses since March 2022, forced the resignation of President Gotabaya Rajapaksa, which led to Ranil Wickremesinghe becoming president on July 21. The new government has been negotiating with foreign creditors to restructure debts on which Sri Lanka defaulted in May, and with the International Monetary Fund (IMF) for a bailout. These discussions are unfolding amid a renewed crackdown on dissent, which has damaged the new government’s credibility.

“Sri Lankans are facing desperate food insecurity and other hardships, yet the new government is focused on repressing peaceful protesters and social activists,” said Meenakshi Ganguly, South Asia director at Human Rights Watch. “The government should be engaging with the public and international financial institutions to address Sri Lanka’s massive economic crisis.”

In July, Human Rights Watch interviewed 20 people in Colombo who were struggling to get by on dwindling incomes, with inflation over 50 percent, and some necessities nearly unobtainable at times. Those interviewed said they had cut back and were only eating two meals a day and were taking loans to meet basic expenses, such as electricity bills and rent.

The United Nations estimates that 5.7 million people in Sri Lanka need humanitarian assistance, with 4.9 million – 22 percent of the population – being food insecure, meaning they do not have consistent access to adequate, nutritious food. Families were already struggling from the pandemic, with 36 percent reporting reducing their food consumption in a UNICEF survey in late 2020. That number doubled to 70 percent in a survey conducted in April 2022, just as the economic crisis hit.

A police officer who earns rupees 45,000 (US$126) a month said his family was going into debt: “It’s affected me very badly.” A street sweeper with a 6-month-old baby said she joined the protesters calling for a change of government and action to address corruption. “When the baby was born a bar of soap cost 80 rupees,” she said. “Now it’s 210.”

Others were struggling to buy medicine, which the government previously provided. Following two years of disruption caused by the Covid-19 pandemic, schools had to be closed for a month because of fuel shortages and only reopened on July 25. Although in many cases lessons were provided online, many interviewees said they could not afford internet access for their children. Reports indicate that many children have been dropping out of school.

International financial institutions and governments that hold Sri Lanka’s debt or are involved in negotiations around debt restructuring have an international legal obligation to act to protect human rights in situations of economic crisis. Private creditors have a responsibility under the United Nations Guiding Principles on Business and Human Rights to address adverse human rights impacts with which they are involved.

The following urgent steps are needed to Address Sri Lanka’s economic crisis:

Social Protection
Sri Lanka’s principal social protection program, Samurdhi (“prosperity” in Sinhala), is intended to make cash payments to very low-income households. However, it is widely recognized as ineffective and corrupt, with perceived political allegiances often being a consideration for benefits. The World Bank reported in 2021 that, “less than half of the poor were beneficiaries of Samurdhi, and benefit amounts remain largely inadequate.”

A leading Sri Lankan policy expert, who asked not to be named because he is involved in ongoing discussions, said that Samurdhi is “poorly targeted, poorly designed, and politicized, with massive leakages.” Another expert said that “Samurdhi is a huge politically captured patronage program,” and asserted that there is significant resistance to reform from within the government.

Among the 20 people interviewed, most said that no one in their household was formally employed and that they were struggling to make ends meet, but none were receiving Samurdhi payments. A 55-year-old woman from Kandy, who had lost her job during the economic crisis, said, “We used to receive Samurdhi but when my brother got a job [seven years ago] we were cut off. … They [government officials] look after their supporters. A new party was elected and we were cut off.” An unemployed house painter, 32, said, “You need political support” to receive Samurdhi.

UNICEF and the UN Development Programme have urged the Sri Lankan government to adopt universal social protection programs, which provide benefits to everyone in specific categories, such as children or older people. Such programs have been shown to be more effective at reducing poverty, and less prone to political capture or corruption than programs with means tests. To protect the rights of Sri Lankans from the effects of the economic crisis, the government should work with international partners, including the IMF, to:

  • Establish a new social protection system that is both adequate to protect everyone’s rights from the effects of the economic crisis, and designed to prevent mismanagement and corruption with a view toward universal coverage;
  • Adequately fund the public health and education systems.

Fair Taxation
A key driver of Sri Lanka’s economic crisis is the extremely low tax rates, with tax exemptions that primarily benefit the wealthiest Sri Lankans and foreign investors. Economists told Human Rights Watch that powerful commercial interests have “eroded the tax base for years,” in many cases exempt from paying any corporation tax, leaving the government increasingly reliant on borrowing, including to service its debt. In 2019, then-President Gotabaya Rajapaksa implemented steep tax cuts that further decreased public revenues, leading to a tax-to-GDP ratio of around 8 percent, among the lowest in the world.

While some of the 2019 tax cuts have been reversed, future tax measures should not further burden low-income people. President Wickremesinghe suggested a more progressive tax policy, saying on August 5 that his government might introduce “taxation on wealth … first for economic recovery and second for social stability.” The government should:

  • Ensure that any new tax measures, including those introduced in an IMF program, are progressive and do not risk further eroding economic rights. Measures can include renegotiating contracts with foreign investors that pay little or no taxes, increasing corporate taxes, increasing income taxes for the wealthiest Sri Lankans, or a wealth tax.

Grand Corruption
Many of the protesters as well as policy experts blamed government corruption in part for Sri Lanka’s economic crisis. The IMF has sought “structural reforms to address corruption vulnerabilities,” while the World Bank said that before it provides new financing, it is “working closely with implementing agencies to establish robust controls and fiduciary oversight to ensure these resources reach the poorest and most vulnerable.”

Three bills to address corruption were developed under the Sirisena administration between 2015 and 2019, when President Wickremesinghe was prime minister, but have never been made public. One, described as a composite anti-corruption and bribery law, is based on a 2019 national action plan that followed extensive consultations. Another, to deal with proceeds of crime and asset recovery, was developed in 2018; and a third relates to the declaration of assets by public officials. To address corruption and uphold the rule of law the government should:

  • Commit to adopting robust anti-corruption measures based on previous proposals, with appropriate public scrutiny;
  • Enact procurement legislation requiring open bidding for government contracts;
  • Rejoin the Stolen Assets Recovery (StAR) initiative, a joint program of the World Bank and the United Nations Office on Drugs and Crime.

Equitable debt restructuring
Sri Lanka’s foreign creditors include governments, international financial institutions, and private creditors. According to the Sri Lankan government, China and Japan each hold 10 percent of Sri Lanka’s debt; the Asian Development Bank holds 13 percent, and private creditors, largely US and European financial firms, hold 47 percent.

Sri Lanka is currently negotiating debt restructuring with these creditors. Economists have expressed concerns that if these debts are not sufficiently reduced, the government’s domestic debts will also need to be restructured, which could trigger a banking crisis and throw the country into deeper turmoil. Among those who would be most exposed are low-income people with investments in the government’s provident fund, which has large holdings of government bonds.

  • Sri Lanka’s major foreign creditors should restructure their debt to mitigate the adverse human rights impacts of Sri Lanka’s economic crisis.

Sri Lanka’s deepening economic crisis highlights the need for the government to give priority to the rights of the people,” Ganguly said. “The Sri Lankan government, along with the IMF and foreign creditors, need to act urgently to reverse the tide that is driving millions into poverty.”

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