Sri Lanka’s Economic Crisis

Recent Developments

• Both the PM Wickremesinghe and President Gotabaya Rajapaksa agreed to resign amid mounting pressure from the protesters who were demanding their resignation.
• Much of the public’s ire is focused on President Rajapaksa and his brother, former Prime Minister Mahinda Rajapaksa, who resigned in May after weeks of anti-government protests that eventually turned violent.

What is the current economic situation in Sri Lanka?

• The island nation is so debt-laden that its economy had “collapsed” and is heading for “rock bottom”.
• Sri Lanka is short of cash to pay for imports of necessities and already defaulting on its debt.
• Sri Lankans are skipping meals as they endure shortages and lining up for hours to try to buy scarce fuel.
• The result is a country hurtling towards bankruptcy, with hardly any money to import gasoline, milk, cooking gas and toilet paper.
• Growing numbers of Sri Lankans are seeking passports to go overseas in search of work. 
• Meanwhile, the Sri Lankan rupee has weakened in value to about 360 to the US dollar. 

Reasons behind the current economic crisis

• Economists suggest that the crisis stems from domestic factors such as years of mismanagement and corruption.
• The government owes $51 billion and is unable to make interest payments on its loans.
• And its currency has collapsed by 80 per cent, making imports more expensive and worsening inflation that is already out of control, with food costs rising 57 per cent.
• Tourism has been a great source of earning but the economic conditions have been deteriorating for the past several years. In 2019, Easter suicide bombings at churches and hotels killed more than 260 people. That devastated tourism, a key source of foreign exchange.
• The government needed to boost its revenues as foreign debt for big infrastructure projects soared, but instead Rajapaksa pushed through the largest tax cuts in Sri Lankan history. The tax cuts were recently were reversed, but only after creditors downgraded Sri Lanka’s ratings, blocking it from borrowing more money as its foreign reserves sank. 
• In April 2021, Rajapaksa banned imports of chemical fertilizers. The push for organic farming caught farmers by surprise and decimated staple rice crops, driving prices higher.
• To save on foreign exchange, imports of other items deemed to be luxuries also were banned. Meanwhile, the Ukraine war has pushed prices of food and oil higher.
• Inflation was near 40% and food prices were up nearly 60 per cent in May.
• Political corruption is also a problem; not only did it play a role in the country squandering its wealth, but it also complicates any financial rescue for Sri Lanka.

What steps are being taken to handle the current crisis?

• The government is in negotiations with the IMF on a bailout plan
• Sri Lanka has been seeking help from neighbouring India and China and from the International Monetary Fund.
• United Nations launched a worldwide public appeal for assistance. So far, projected funding barely scratches the surface of the $6 billion the country needs to stay afloat over the next six months.

Analysis The current economic crisis shows that how economy and the politics of a country is so interconnected that turmoil created in any sphere influence the other sphere. So, political parties and governments for the stabilization should not be negligent in their practices that it leads to long term political disruptions. The current crisis is not only a problem of Sri Lanka only, it influences the China that has invested heavily in the country. It influences India’s Tamil Diaspora in Sri Lanka which may further deteriorate India- Sri Lanka relations and there are chances that it may leads to eruption of Civil War again. The presence of Sri Lanka on the busiest water route of the world raises a question of trade security also.