Published: 01st April 2022
#WhatTheFAQ: What led Sri Lanka to the severe economic crisis that it finds itself in?
Late night on Thursday, March 31, people protested in front of the Sri Lankan President's house and made their fury known
Yes, the pandemic is one of the biggest factors that brought on the economic crisis in Sri Lanka, but there are several other factors at play. Drop in tourism numbers, badly timed tax cuts, sky-high inflation, crumbling government finances and more have all together led to a point where the citizens of the island nation are furious. So much so that people in the capital city of Colombo are showing their outrage via protests near President Gotabaya Rajapaksa's house, demanding that he step down. This happened on Thursday, March 31, late into the night. People were arrested, police buses were burnt, but the anger rages on.
The severe economic crisis that Sri Lanka is facing has been a long time in the making. In today's edition, we explore the factors that led to the circumstances that Sri Lanka finds itself in today.
So, how did Sri Lanka get here?
The economy of Sri Lanka has been facing structural problems for many, many years. Due to borrowing foreign currencies, its foreign exchange reserve increased; then the Chinese loans on low-return projects like airports, ports and so on.
Tourism has been the biggest strength of the country, but with the pandemic, this was hit badly. But even before that, the country never had a chance to actually recover from the Easter bombing of 2019, wherein three churches and three luxury hotels were targetted.
The crisis also has its root in Sri Lanka's ban on imports in March 2020. The intention behind making this move was to save foreign currency for the government's $51 billion debt, but it led to price rises and shortage of essentials.
What about the finances?
Since January 2020, the foreign currency reserves of Sri Lanka dropped 70 per cent, to about $2.3 billion by February. This is a fall of about $779 million from December 2021, according to a report by Business Today. On one hand, for the rest of this year, it has $4 billion debt payments and, on the other hand, it has reserves enough to just pay for a month of exports. This means that there will be a further fall in essential commodities.
In the fourth quarter of 2021, the Sri Lankan economy grew at slower than 1.8 per cent and its full-year growth was 3.7 per cent. International rating agencies have downgraded Sri Lanka's credit ratings and there are several experts who are of the belief that the country might not be able to service its $51 billion sovereign debt this year.
What role did the Government of Sri Lanka play in this?
Gotabaya Rajapaksa, during his presidential campaign, guaranteed that he would cut 15 per cent value-added tax by half and get rid of a few other taxes as well. In the year 2019, the tax cuts were announced and this brought down the country's revenue.
As a result of all this, what are the people of Sri Lanka going through?
Power-cuts, induced by the fuel shortage, are now about seven to ten hours long. Since there is no fuel to generate hydroelectricity either, there is a shortage of 750 megawatt of thermal power. At one point, state-owned Ceylon Petroleum Corporation (CPC) said that there will be no petrol in the country for two days. Needless to say, there are long queues of people outside the petrol stations. The printing industry has taken a hit and as a result, school examinations have been postponed. Hospitals have halted surgeries and there is a shortage of overall essential commodities. The situation looks grim.
What is India doing to help?
It was in January that a $400 million swap that would help Sri Lanka shore up its reserves was announced by the Reserve Bank of India (RBI). Then, followed a $500 million and $1 billion credit line to purchase fuel from India and to import essentials, respectively, in February.