BRONX, New York — Sri Lanka, a South Asian island nation of 22 million people, is grappling with “an economic and political crisis,” causing mass protests and prompting government officials to step down from office. According to the World Bank, Sri Lanka’s poverty rate (at $3.20 per day poverty line) stood at 10.9% in 2021. However, Sri Lanka’s economic crisis could severely exacerbate poverty in the nation. With mounting debt and record-high inflation, Sri Lanka’s economic crisis is its worst since the nation’s independence in 1948.
Causes of Sri Lanka’s Economic crisis
- Lack of Foreign Reserves: Sri Lanka “has been running a trade deficit for decades.” This has led to the draining of foreign currency, “leaving traders unable to pay for imports.”
- Hits to the Tourism Industry: In April 2019, a series of bombings by the “local militant group National Thowheed Jamath (NTJ)” hit three luxury hotels and three churches in the nation, leading to the deaths of close to 270 individuals. The bombings impacted the tourism sector and the pandemic only hindered this recovery. Considering that tourism accounts for more than 10% of the Sri Lankan GDP, such hits worsened the nation’s ability to repay its debt.
- Agri-Sector Crisis: In 2021, the Rajapaksa government, with the aim of moving toward 100% organic agriculture, chose to ban chemical fertilizers. This decimated farmers’ yields, more so in the rice and sugar sectors. The government has since partially lifted the ban.
- Ill-Advised Tax Cuts: In a bid to revitalize the economy, the government cut taxes. However, this had the backfiring effect of greatly impacting government revenue. The action also “prompted rating agencies to downgrade Sri Lanka to near default levels,” which meant the “country lost access to overseas markets.”
- Government Mismanagement: Rather than supporting the local economy and boosting its exports, the Sri Lankan government has been borrowing vast sums of money to fund public services and imported goods. Thus, the country’s public debt rose from “94% of the GDP in 2019 to 119% of GDP in 2021.” Moreover, the government spent its foreign exchange reserves on repaying the debt, “shrinking its reserves from $6.9 billion in 2018 to $2.2 billion in 2022.” Consequently, the nation lacks sufficient foreign currency to fund imported goods.
- Russia-Ukraine Conflict: The ongoing conflict between Russia and Ukraine has led to a staggering “price inflation of crude oil, sunflower oil and wheat.” At the peak of the crisis, “crude oil prices hit a record high” of more than $125 per barrel. Such drastic increases in fuel and commodities are detrimental to the lives of ordinary Sri Lankans.
Effects of Sri Lanka’s Economic Crisis
Being that Sri Lanka highly depends on imports for essential food, fuel and pharmaceutical items, the lack of foreign reserves to pay for import bills means that the supply of such goods has become very limited and highly rationed.
The daily lives of Sri Lankans now involve “an endless cycle of waiting in lines for basic goods.” Soldiers are stationed in fuel stations to control customers who queue for long hours in uncomfortable conditions in an effort to get fuel. Three elderly people even succumbed to death during these waits. In addition, hospitals “no longer had access to imported medical tools and vital drugs,” leaving them unable to perform surgeries.
Some have taken to the streets to demand “government action and accountability” and the resignation of President Rajapaksa. The public anger reached a head on March 31 “when demonstrators hurled bricks and started fires outside the President’s private residence.” In response, on April 1, the government implemented a 36-hour curfew and a nationwide public emergency, authorizing public arrests and social media restrictions. However, in defiance, protests continued. Although the government revoked the emergency decree on April 5, mainly peaceful protests persisted.
The administration is in chaos with 26 cabinet ministers resigning over one weekend in early April 2022. This led to the dissolution of the government’s cabinet in its entirety on April 3. In an attempt to maintain stability, President Rajapaksa reshuffled the cabinet by redistributing roles and temporarily appointing new officials. The ruling Sri Lanka People’s Front Coalition “lost 41 seats” as members backed out. Overall, by April 7, the party had just “104 seats, losing its majority in parliament.”
India and China Offer Aid
Sri Lanka owes debt payments of nearly $7 billion with a $1 billion bond repayment due in July 2022. The nation seeks financial support from regional powers to deal with the financial crisis.
India has been proactive in offering assistance. Earlier in February 2022, it had given a $500 million credit to Sri Lanka to “fund the country’s fuel purchases.” Later in March 2022, India finalized “a $1 billion line of credit for food, medicine and other essential items” to Sri Lanka. It has also committed to sending 300,000 tonnes of rice to Sri Lanka over the next few months. In total, the Indian government has committed $2.6 billion to Sri Lanka so far. In March 2022, China provided aid in the form of a $1.5 billion credit, a $1 billion loan and shipments of 2,000 tonnes of rice.
The Road Ahead
Although there is still much uncertainty about the future of Sri Lanka’s economic crisis, one cannot understate the importance of financial support and humanitarian aid from the international community cannot. With more powers rallying around Sri Lanka, the nation can restore its stability.
– Divine Adeniyi