Explained: How Sri Lanka ended up in this severe economic crisis
You must have seen snippets of Sri Lanka’s economic crisis on TV channels and social media, right? Well, the island nation has been in the throes of a severe economic crisis since April 2022. Lack of foreign funds has resulted in long lines for fuel, cooking gas, and other necessities, while power outages and increasing food costs have added to the misery of its citizens. The economic crisis also sparked political unrest in Sri Lanka. A nationwide curfew was implemented on 16th May and was in effect until 5 AM on 17th May.
Since 2019, the country has witnessed high inflation, huge debt, falling currency, and bleeding foreign reserves. Presently, it has defaulted on its foreign loans for the first time since it was declared a free nation. Hang in there. This is not all. Inflation has also reached an all-time high of 17. 5 per cent. Do you know how much does rice cost in Sri Lanka now? Well, the price of 1 kg of rice is as high as 500 Sri Lankan rupees now. Under normal circumstances, it wouldn’t cost more than 80 Sri Lankan rupees per kg.
Well, all these didn’t happen in one day. The factors that have led to this severe crisis have been brewing from long. We take you through the timeline of Sri Lanka’s financial emergency.
2016
Sri Lanka has received 16 loans from the International Monetary Fund (IM) since 1965. Each of these IMF loans had some requirements, such as reducing the budget deficit, maintaining a restrictive monetary policy, reducing government subsidies for food for the people of Sri Lanka, and depreciating the currency so exports would become more viable. However, Sri Lanka couldn’t stick to the requirements.
However, the country received its most recent IMF loan between 2016 and 2019. The amount is to the tune of .US$1.5 billion over three years. The economic health of Sri Lanka deteriorated significantly during this time. There was a marked decrease in growth, investments, savings, and revenues all decreased. But the debt burden kept on increasing.
April – November 2019
If you are someone who keeps a tab on world news, then you must be remembering the bomb blasts in Colombo’s churches and hotels in April 2019. Well, this reduced the country’s foreign exchange reserves by 80%. Gotabaya Rajapaksa introduced massive tax cuts after winning Sri Lanka's presidential election in November 2019. Tax cuts kept on increasing as the Sri Lankan Cabinet reduced the value added tax from 15% to 8% and eliminated seven other taxes, including a 2% nation building tax paid by corporations. The drastic tax cuts led to a credit rating downgrade in 2020, denying Sri Lanka the access to international financial markets. As a result of all these, the foreign reserve of the country kept on depleting. It fell from a healthy $8,864 million in June 2019 to $2,361 million in January 2022.
March 2020
The COVID-19 pandemic in March 2020 complicated the problem even more. On one hand, tourist inflow and income fell further, and on the other, tea and rubber exports fell due to lower demand and remittances. While the GDP fell by 3.5%, the current account deficit reached 7.9% of GDP, and the budget deficit increased to 11.1%.
April 2021
During this time, the Rajapaksa administration committed another blunder in April 2021. All fertiliser imports were prohibited to avoid depleting foreign exchange reserves. Sri Lanka, as well all know, has been a 100% organic farming nation. This strategy, which was later repealed in November 2021, resulted in a steep drop in agricultural output, necessitating increased imports.
April 2022
Sri Lankan President, Gotabaya Rajpaksha declared a state of emergency on April 1, 2022. However, he had to withdraw it in less than a week after significant protests by outraged citizens over the government's inability to handle the crisis. The problem grew worse on April 4 once the entire Sri Lankan Cabinet resigned. Apart from President Gotabaya Rajapaksa and his elder brother, Prime Minister Mahinda Rajapaksa, all 26 ministers had quit.
March 2022
By the end of March this year, the situation had worsened as a critical dearth of foreign currency rendered the island nation unable to pay for essential imports. This resulted in severe shortages of everything right from life-saving medicines to cement. Since March, demonstrations had expanded across the country as citizens began to feel the heat of the economic crisis and accused the government for mismanaging the economy. This, in turn, had brought Sri Lanka on the verge of bankruptcy. Many people were even seen flocking to the streets at first, despite emergency legislation making demonstrations illegal and giving the government broad powers.