Sri Lanka has been facing one of the worst economic crises resulting from a number of factors including mismanaged government finances, ill-timed tax cuts and the Covid-19 pandemic. Making the crisis worse is the ongoing conflict in Ukraine which has resulted in a global rise in oil prices. According to the government’s statistics department, the country’s economic growth has been slower than expected with 1.8% in the fourth quarter of the financial year 2021, taking its full year growth to 3.7%.
The Mahinda Rajapaksa government is struggling to pay for essential imports, including food and fuel after a 70% drop in foreign exchange reserves in the past two years to about $2.31 billion. The country was left with foreign reserves of only $2.31 billion as of February even when it faces debt payments of about $4 billion through the rest of the year. This $4 billion debt includes a $1 billion international sovereign bond that matures in July. The falling levels of foreign exchange reserves accrue to a slump in foreign investments which fell from $793 million in 2019 to $548 million in 2020. Inflation in the country has reached 15.1% with food inflation rising to 25.7%.
Sri Lanka depends on imports for most of its essential commodities including fuel, food and medicine. A drop in its foreign exchange reserves and rising prices have impacted the country’s imports, thus keeping essential goods out of reach of many Sri Lankans. It has reached a point where schools in the country were forced to cancel exams due to a shortage of paper and ink. Shortage in fuel was already leading to long hours of power cuts across the country. But, on March 27, the daily power cuts were further extended to 10 hours.
The fight for fuel is worsening in the country. Sri Lanka ordered troops to petrol stations two weeks back as sporadic protests erupted among thousands of people who had queued up for fuel. Fuel shortages have led to long lines at petrol stations.
Job losses have been on the rise in the country. The government has identified 5 million families with “fragile financial status of low-income households” and provided them with a Rs 5,000 allowance during the Covid-19 lockdowns. That helped only briefly, with the recent economic crash compounded by the Russia-Ukraine conflict which led to a hike in oil prices.
The country is also faced with soaring inflation. In March 2020, Colombo had imposed a broad import ban to save foreign currency needed to service its $51 billion in foreign debts. However, this has led to widespread shortages of essential goods and sharp rises in prices.
Even a cup of tea now costs Rs. 10, up from Rs 25 as of October last year, as per a report by the country’s local media website. A sudden rise in prices of key commodities has left many people at the mercy of subsidies as all essential goods are in short supply due to import restrictions forced by the forex crisis. People in the country are extremely angry and disappointed as they fight for items of daily need.
Sri Lanka’s central bank has devalued the rupee by up to 15%. The Central Bank of Sri Lanka, with immediate effect, set an exchange rate limit of Rs 230 per dollar compared to a limit of 200-203 that had prevailed since October.
The roots of the current economic crisis in the country go back to colonialism and the following 26-year civil war. Sri Lanka gained independence from Britain in 1948. The civil war was fought between the government military of this majority Sinhalese country and armed separatists from the Tamil-speaking minority. Toward the end of the war, in 2006, the government attempted to jumpstart growth by borrowing heavily and attracting foreign capital. This strategy worked for a short period of time. The economy boomed leading to the per capita GDP to surge from $1,436 in 2006 to $3,819 in 2014. By 2019, Sri Lanka ascended to the ranks of the World Bank’s “upper middle-income” countries. This lasted only for a year, as all this growth came at a cost. The country’s external debt tripled from 2006 to 2012, pushing total debt to 119% of GDP.
Recent factors which have exacerbated the economic crisis are the culmination of the pandemic and the Russia v/s Ukraine war. Sri Lankan economy heavily depends on tourism, with tourists spending $5.6 billion in 2018. The tourism industry was hit hard by the global pandemic. By March 2022, war in Ukraine added to the crisis as international prices of oil, wheat and other commodities went up. Russians frequently made up the biggest share of Sri Lankan tourists, with Ukrainians not far behind. Due suspension of flights from Moscow, the Sri Lankan tourism industry was further threatened.
Sri Lanka has turned to China for help with China considering a $2.5 billion loan request from Sri Lanka. India has also offered to help its neighbour. It has agreed to extend a $1 billion credit facility to the Sri Lankan government to ensure essential commodities for the people. “Neighborhood first. India stands with Sri Lanka. US$ 1 billion credit line signed for the supply of essential commodities. Key elements of the package of support extended by India,” External Affairs Minister S Jaishankar tweeted.
Sri Lanka is also seeking aid from the IMF. President Gotabaya Rajapaksa stated that he had given a green light for an IMF programme to aid Colombo.
There is a growing apathy amongst the people against the government. Thousands of people from across the country have taken to the streets to protest and demand action against the on-going crisis. However, the Sri Lankan government has declared a state of emergency across the country by enforcing a nationwide curfew and banning social media platforms. Internet users were unable to use platforms such as Facebook, Twitter, YouTube and WhatsApp for nearly 15 hours. The state used force by firing tear gas and water cannons to disperse student-led protests who defied the curfew.
There is also a section of Sri Lankans who are leaving the country as the crisis deepens. Due to a lack of food and fuel, several families have fled the island country to the shores of Tamil Nadu seeking refuge.
The coming days are going to be a brutal test for the people of Sri Lanka as well as the Sri Lankan government as the country tries to deal with one of the worst economic crises.