Sri Lanka is facing what experts say is the country’s worst economic meltdown since gaining independence in 1948, and things are likely to keep getting worse. Supplies of food, fuel, gas and medicine are falling drastically, sending the cost of these basic goods skyrocketing – so the public have taken to the streets to protest. People wanting answers and basic necessities from the government are currently being met with curfews, tear gas and arrests. What are the events that led here? Here’s the primer on why there is an economic crisis in Sri Lanka, and what needs to happen to fix it.
Update 20 July 2022: Ranil Wickremesinghe has been elected by MPs as the new President of Sri Lanka, after former President Gotabaya Rajapaksa fled the country and resigned. Wickremesinghe had been acting as the interim Prime Minister after Mahinda Rajapaska resigned from the role (detailed in the update below). It is important to note that protestors have also called for Wickremesinghe to resign and set his house on fire. They consider him to be part of the corrupt elite that has caused the crisis, and are unlikely to stop protesting.
Update 11 May 2022: The situation in Sri Lanka has become much more dire after the country’s Prime Minister Mahinda Rajapaksa resigned. Rajapaksa’s spokesman Rohan Weliwita said the 76-year-old leader sent his resignation to clear the way for a “new unity government”, suggested by the president (who is his brother), to fight the country’s worst economic crisis. The PMs resignation comes as a response hours after his party’s supporters stormed a major protest site in the capital Colombo, on Monday, attacking anti-government demonstrators and clashing with police who used tear gas and water cannons on all involved. For weeks, thousands of protesters have gathered daily to hold peaceful protests demanding the resignation of President Gotabaya Rajapaksa and his government as the country’s economy continues to drastically deplete. It was reported that at least seven people, including an MP, were killed in that protest and more than 200 have been wounded.
The Sri Lankan government has responded to Monday’s escalation by continuing the nationwide curfew and granting military and police forces the ability to shoot or arrest people without a warrant.
Unfortunately it does not really seem like the end is in sight. Constant power outages, lack of basic essentials like food or gas, and now medicine shortages, have led the Singapore Red Cross to call this an “unprecedented humanitarian crisis.” Doctors have reported washing and reusing medical equipment like catheters – even performing a surgery by the light of mobile phones. Sri Lanka’s foreign reserves have continued to plummet and multilateral donor agencies have not been as supportive as the government hoped. This includes the IMF which did not offer an immediate bailout. The nation’s central bank chief, Nanadalal Weerasinghe, said he was hopeful a final deal with the IMF would be established within three months. “The key objective is to achieve debt sustainability before an IMF program,” Weerasinghe said, adding that experts will be named shortly to renegotiate Sri Lanka’s debt estimated at $51 billion.
What’s Happening in Sri Lanka Right Now?
Sri Lankan President Gotabaya Rajapaksa declared an economic emergency in September. It allowed the government to take control of the supply of basic food items, and set prices to control rising inflation, which spiked to 17.5% in February 2022.
Since then life has been extremely bleak for people in Sri Lanka. Food shortages are rampant. Shops have been forced to close because they can’t run fridges or cooling systems. The country cancelled examinations for millions of students because it had run out of printing paper and could not pay for imports. Soldiers are stationed at gas stations to calm customers, who line-up for hours in boiling heat to fill their tanks – some people have died while waiting. Many state hospitals have also been forced to stop routine surgeries because of a shortage of life-saving medicines that are now being saved for emergencies. Outraged by the state of the nation, protestors have spent the past few weeks demanding better conditions and solutions. They have been met with brutality from authorities, with hundreds arrested.
The government has rolled out blackouts across the island for up to 13 hours a day, as they government don’t have adequate FOREX reserves to pay for import of fuel. Power Minister Pavithra Wanniarachchi said: “We have already instructed officials to shut off street lights around the country to help conserve power.”
The government has taken severe measures to deal with both the economic crisis and the protests over it. It declared a State of Emergency, imposed a 36-hour-long curfew and a brief ban on social media. This did not stop thousands of people, including opposition lawmakers, from taking to the streets to demand the Sri Lankan president, Gotabaya Rajapaksa, be removed from his position.
This situation is creating a potential refugee crisis, with many Sri Lankans fleeing to the shores of Tamil Nadu in India. They are leaving due to the rising prices of food and essentials, and the lack of available work in Sri Lanka as businesses crumble.
Sri Lanka is facing an economic crisis and is on the verge of default.
— anshul gupta (@anshgupta64) February 13, 2022
What led to this situation?
A thread 🧵 pic.twitter.com/u3untEqpqx
How Did Sri Lanka Get To This Point?
There isn’t one singular reason why Sri Lanka is in this crisis – it’s an accumulation of bad decisions, made worse by the COVID-19 pandemic and Russia’s war in Ukraine. The five key factors that have created the crisis are:
Sri Lanka’s Massive External Debt
Sri Lanka’s public debt is projected to have risen from 94% in 2019 to 119% of GDP in 2021. The country is estimated to have $4 billion in debt due in 2022. In the early 2000s, Sri Lanka adopted an infrastructure-centric growth model based on China’s approach, hoping it would be able to create jobs and usher prosperity for the country. The government also turned towards China for money to fund its infrastructure projects. China has invested $12 billion on Sri Lanka’s infrastructure projects from 2006 till 2019 and continues to fund infrastructure projects like the Colombo Port City. The project is expected to be completed in 2043, meaning Sri Lanka is unlikely to get any revenue from it almost 20 years. Even after it’s finished, 43% of the reclaimed land will be leased to China for 99 years because Sri Lanka has no other way to finance it.
Basically, Sri Lanka is caught in a vicious cycle of lending money from China without being able to pay them back. This means Sri Lanka will either have to give up control of these projects or take out further loans to pay China back, digging their hole even deeper. The debt has forced the government to repeatedly devalue its currency just to be able to buy food for its people.
Decline in FOREX Reserve Due to Heavy Imports
Forex reserves are assets that a country holds in foreign currencies (foreign exchange). They are held in reserve, so the government has something of value to pay for stuff with if it’s own country’s currency crashes.
As of February, Sri Lanka had only $2.31 billion in its reserves, but it’s debt repayments will be around $4 billion in 2022 alone. This means Sri Lanka does not have enough forex reserves to import fuel, food and medicine, driving prices of these now rare commodities even higher. These basic necessities are now completely unaffordable for the public.
Decline in Tourism
Tourism is the third-largest source of foreign exchange for Sri Lanka, but the number of tourists was down 18% following the Easter Sunday bombings in April 2019. In 2020 the COVID-19 pandemic also hit the industry very hard. The government removed all quarantine requirements for fully vaccinated tourists in November 2021, but because it had officially declared an economic crisis just two months before, Sri Lanka wasn’t exactly at the top of people’s travel list. On top of this, Sri Lanka usually has high levels of tourism from Russia and Ukraine, which has been cut off because of the war.
High Level of Corruption in Government
The Rajapaksas family has run the Sri Lankan government for years now. The President (Gotabaya Rajapaksa) and Prime Minister (Mahinda Rajapaksa) of the country are brothers. and many elected ministers, including the Finance Minister, are all part of the same family. They are infamous for making decisions in the interests of their own family and power, making the same mistakes again and again, and disregarding the public opinion or expert advice. This includes the ban of chemical fertilisers, reluctance in approaching the IMF for support, and the New Fortress Energy deal that sparked widespread protests and grave concern about rising debt from the opposition. Most of these events happened under the easy excuse of “because: the pandemic”.
Government Banning Usage of Chemical Fertilizer
In April 2021, President Gotabaya Rajapaksa decided to ban chemical fertiliser, claiming locally-produced organic fertiliser was better. This led to widespread protests from farmers as it eliminated US$400 million per year of fertiliser subsidies the government had previously provided. The abrupt decision seems to also have added to the rice shortage in the country, and will likely cost the government US$450 million in rice imports over the next few months – well and truly eliminating any savings from fertiliser subsidies.
Sri Lanka’s president is set to appoint a new cabinet Monday as security forces brace for possible violence with more protests expected against worsening shortages of food, fuel and medicineshttps://t.co/LLwGD2CBDJ pic.twitter.com/jepab0GIsj
— AFP News Agency (@AFP) April 4, 2022
How Does Sri Lanka Get Out Of This Crisis?
Right now the country has two options: restructure their debt or ask for a relief package from the International Monetary Fund (IMF). Currently it looks like the government is trying a bit of both.
Though initially reluctant, Sri Lanka has sought out assistance from the IMF and World Bank. The government has also secured a $1.5 billion line of credit from India, and and possibly another $2.5 billion from China. India and China have provided supplies, including huge shipments of rice, along with a promise of further economic assistance. However it is unlikely that China will agree to the line of credit. Economists say this is because China doesn’t want to set a bad precedent for other nations they’ve lent money to, and because they don’t want to be associated with Sri Lanka’s failure (which was based on China’s economic model).
Unfortunately, the road out of the crisis does not look clear or smooth. Most international economics analysts predict that the situation will become worse in future. The government may be able to calm the worst of the current crisis with international assistance and loans in the short term… but loans contributed to getting the country into this mess in the first place. In the long term, recovery will require meticulous planning and significant political change for the long term economic stability and welfare of the country – not an easy feat.
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