The Diplomat | Mushtaq Khan, Pallavi Roy, Ulrich Volz
Sri Lanka's 2022 default stemmed from a crisis of governance, not merely a fiscal accident, highlighting the inadequacy of standard "good governance" reforms like those prescribed by the International Monetary Fund. These reforms, relying on transparency and formal oversight, are easily circumvented in developing economies where powerful networks of politicians, bureaucrats, and businesses collude to inflate project costs. Following Mahinda Rajapaksa's 2008 electoral victory, Sri Lanka embarked on an infrastructure boom financed by China, India, and international bond markets, including projects like the Mattala Rajapaksa International Airport, Hambantota Port, highways, and the Mannar Wind Power Project. Approximately 65 percent of foreign debt accumulated in the decade preceding the crisis was tied to transport, energy, water, and port/airport infrastructure. Many of these mega projects, such as the Mannar wind power project where the agreed price was around 2.7 U.S. cents per kWh higher than the actual market price, failed to yield expected economic returns, significantly contributing to the nation's eventual default. Preventing future unsustainable borrowing requires empowering local actors and fostering genuine competition.
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