Sri Lanka’s Economic Crisis
Soaring inflation, vast piles of debt, bleeding foreign reserves, and tanking currency have put Sri Lanka into a four years ongoing humanitarian crisis. $ 77 million of foreign debt repayments, a 32% inflation rate, and a shortage of food, medicines, and fuel are major problems the country faces nowadays, so how did Sri Lanka manage to get this far?
To understand Sri Lanka's challenging economic situation, let's go through the timeline of the whole story.
The year 2019 marked the beginning of everything, as president Gotabaya Rajapaksa was running for election. Deep tax cuts were one of his election promises to the public. But how will the nation generate revenue then? Soon after, 90% of the nation's financial resources will be lost. However, Rajapaksa was elected president that same year without predicting such outcomes, and several significant tax cuts followed.
In 2020, the country was hit by economic headwinds, notably the COVID-19 pandemic. This meant that Sri Lanka had to close its borders to tourists for more than one and a half years, leading to the devastation of the tourism industry. As a result, in 2020, Sri Lanka was visited by only $0.17 million tourists, while in 2018, the number was $2.3 million. As a result, by the end of the year, the country's tourism revenue was down to $ 2.8 billion against $ 7.5 billion in 2019. Since tourism accounts for 13% of Sri Lanka's GDP, with tourists being a significant source of foreign currency, the year 2020 devastated the country's economy.
In 2021, Rajapaksa ( president of Sri Lanka) announced the prohibition on all chemical fertilizers, justifying the decision as "good for health."However, critics said Sri Lanka was undertaking this action to save the dollar. The country was, by that time, trying to preserve its depleting foreign reserves by banning the imports of fertilizers. Meanwhile, the primary food crop of rice, which accounts for the main agricultural output, fell by more than 50%. So, in June 2021, the country was obliged to import rice, something that hadn't happened for decades.
By July 2021, the revenue from tax had fallen, agricultural production had accounted for 8% of GDP, tourism revenues had plummeted dramatically, and so had remittances. Since all these problems coincided with the COVID-19 pandemic, foreign agencies could not lend money to Sri Lanka. The only solution for those issues then was to turn to its neighbors.
By the end of 2021, Bangladesh loaned Sri Lanka $ 200 million, and India, at the beginning of 2022, loaned an urgent $ 500 million Indian loan to pay for oil. As financial aid continues to be sent to Sri Lanka, its national debt has already surpassed $ 30 billion.
Plunging deep into a political and economic crisis, the protests in the island nation started to rise, with millions of people demanding the president's resignation after suffering for months of severe food and fuel shortages, lengthy blackouts, and increasing inflation 30.2%. The purchasing power parity of people also decreased; currently, 1$= 326 Sri Lankan rupees. This indicates a 32% drop in the currency's value compared to previous years.
On April 1st of, 2022, president Rajapaksa, who was still in power, declared a temporary state of emergency throughout the nation. At the same time, the country's security was given complete authority to hold and arrest any suspects or participants in the anti-Rajapaksa protests.
Almost all Sri Lanka's cabinet members and central bank officials quit two days later, leaving Rajakapsa and his brother Malinda (the prime minister) to handle the issue alone.
On April 12th 2022, the government announced its failure to pay out the foreign debt of $ 51 billion due to spending its foreign exchange on importing essential goods like medicines, food, and fuel.
The mass protests continued in the country, with even monks joining the protestors. As a result of the events, 10+ protestors were reported dead, 250+ injured, and 600+ arrested, with nearly 200,000 Sri Lankans leaving the country.
By the end of 2022, Sri Lankan citizens had successfully forced Gotabaya Rajapaksa and its corrupt political system from the government. However, as Sri Lanka waits for a $2.9 billion IMF bailout and financial assurance from China and other international creditors, its people will struggle longer.
Written by Ulsan Nurdilda | Proofread by Yasmin Uzykanova
