The Sri Lankan economic crisis is an ongoing crisis in the country of Sri Lanka that began in 2019. It is the worst economic crisis to hit the country since independence in 1948. Since 2010, Sri Lanka's external debt has risen sharply. In 2019 it reached 88% of the country's GDP.
The onset of the global economic recession caused by the Covid-19 pandemic accelerated the crisis. And by 2021, external debt has risen to 101% of the country's GDP. This caused an economic crisis. The ensuing economic crisis led to the 2022 Sri Lankan protests.
Sri Lanka's government under President Gotabaya Rajapaksa made a series of policy blunders. As a result, there was a huge economic crisis in Sri Lanka. After a landslide victory in the 2019 presidential election, it won the 2020 parliamentary election as well and took over the government completely. Since then it has made several mistakes in its economic policy.
As part of its populist plans to win the elections, the current government made major tax cuts in revenue and fiscal policies. Due to the tax cut, the budget deficit rose from 5% in 2020 to 15% in 2022. And the implementation of bad fiscal policies led to a disastrous situation for Sri Lanka. In Sri Lanka, ordinary citizens could not afford the rising cost of living, which led to social unrest and protests.
Sri Lanka is on the brink of bankruptcy as the Sri Lankan government's foreign exchange reserves of US$2.3 billion as of March 2022 will not be sufficient, with US$7 billion needed in July 2022 debt repayment, including US$1 billion worth of bonds. According to the National Consumer Price Index, the national inflation rate increased to 17.5% in February 2022.
In June 2022, Prime Minister Ranil Wickremesinghe told Parliament that the economy had collapsed and was unable to afford essential goods.
Background
Sri Lanka has faced such a devastating economic crisis due to the short-sightedness of politicians who have emphasized temporary solutions and short-term planning instead of long-term planning. One of the reasons for this was the activities of politicians who were very eager to use the foreign loans obtained for the development of infrastructure projects for their own interests.
In 2021, the Sri Lankan government officially declared the country's worst economic crisis in 73 years.
Sri Lanka's local newspapers published caricatures of Sri Lanka asking for financial aid from neighbouring SAARC countries. Sri Lanka's Energy Minister Udaya Kammanpila admitted that the crisis could lead to financial disaster.
Some commentators blame China for the debt crisis. But Australia's Lowy pointed out that Sri Lanka is not "falling into the Chinese debt trap" as debt owed to China was only 10% of external debt as of April 2021. Also, most of Sri Lanka's foreign debt stock was sourced from international capital markets, accounting for 47%. The next 22% are obtained from development banks. Japan then holds 10% of Sri Lanka's external debt.
In 2020, a New York-based firm said that Sri Lanka's current financial resources are insufficient to cover debt service need to be estimated at $4.0 billion in 2021. Instead of making proper economic plans to solve these economic problems, more and more currency notes are being printed and the country is going deeper into debt, increasing inflation. Bellwether noted that Sri Lanka needs a credible fiscal and monetary policy to address the debt crisis, increase taxes to pay off debt, change in interest rates and allow imports to return tax revenue to the treasury. While it is possible to raise interest rates and generate dollars to repay the foreign debt by reducing domestic debt, it is practically difficult to do so consistently for several years. If investors see an increase in foreign exchange reserves after debt repayment, confidence may return, but this may or may not work based on the current ideology.
The impact of the Covid-19 pandemic on Sri Lanka's once-thriving tourism industry has been attributed to the country's inability to generate sufficient national revenue to repay its debts.[18] According to the World Bank, "Although the impact of the Covid-19 pandemic on Sri Lanka's economy and the lives of its people remains enormous, the economy will recover in 2021." Positive signs of recovery are already visible, and proper taxation rates to build self-reliance and avoid heavy dependence on foreign loans in future should be highly encouraged. Current social security efforts to help those who lost their jobs during the credit crunch are considered effective. Economists have opined that proper taxation in addition to export-led growth is necessary to recover the Sri Lankan economy from the current debt crisis, and if done properly, Sri Lanka will achieve full financial recovery.
In January 2022, President Gotabaya Rajapaksa's office said he had appealed to China to restructure its debt burden during talks with Chinese Foreign Minister Wang Yi.
Development
Despite concerns about rising inflation, Central Bank of Sri Lanka Governor Ajith Nivard Cabral said Sri Lanka will not need IMF assistance in January 2022. He also expressed confidence that Sri Lanka will be able to resolve its debt, including its foreign debts. As of February 2022, Sri Lanka's foreign exchange reserves have declined to $2.36 billion. But Sri Lanka has $7 billion in foreign debt obligations, including $1 billion worth of bonds, due by July 2022. The government plans to hire a global law firm to provide technical assistance for debt restructuring.
A delegation of the International Monetary Fund visited Sri Lanka from 7 to 20 December 2021 to assess and review Sri Lanka's economic policies. 2022 The Executive Committee of the International Monetary Fund discussed Sri Lanka's economy after its annual meeting on 25 February 2022. As of February 25, 2022, the International Monetary Fund declared Sri Lanka's public debt burden unsustainable and warned the Sri Lankan government to avoid printing money for monetary needs. While it praised its vaccination drive to mitigate the impact of the pandemic. The International Monetary Fund assessed Sri Lanka's current economic distress by compiling Section IV of the Advisory Assessment. Furthermore, the International Monetary Fund predicts that Sri Lanka's economy will grow by 2.6 percent by 2022.
As of March 7, 2022, the bank has implemented reforms to devalue the national currency with immediate effect, and the official rupee has been devalued at an unprecedented Rs. Central Bank of Sri Lanka Governor Ajith Nivard Kabral also said that it has reduced the value of the Sri Lankan currency to 229.99 against the US dollar. The decision to devalue the Sri Lankan currency is seen as a massive step forward for assistance from the International Monetary Fund. Following the devaluation of the Sri Lankan rupee, the price of all shares in the Sri Lankan stock market fell by 4 percent on March 2022. As a result, Sri Lankan stocks fell to a 4-month low.
Finance Minister Basil Rajapaksa has urged all government officials to turn off all street lights at least until the end of March 2022 as part of an effort to conserve electricity.However, this move is said to have a notable negative impact on the economic participation rate of female workers. Affecting the safety of women working night shifts in supermarkets and other workplaces. Sri Lanka is also experiencing its worst economic crisis in decades and dwindling foreign exchange inflows are causing severe shortages in electricity consumption, fuel consumption and cooking gas. Nearly 1,000 households have been shut down in response to cooking gas shortages caused by the chaotic foreign currency stockpile crisis.The fuel shortage caused by the foreign currency stockpile crisis has led to long queues of vehicles in front of petrol stations for the past few months.[48] The rise in global oil prices has exacerbated fuel shortages in Sri Lanka as not only the risk of overspending but also the country having to spend more than before to import fuel.
While ordinary Sri Lankans are unable to meet their basic needs due to shortage of essential commodities like milk, chicken meat, gas, other food items, fuels, electricity, the Gotabaya government is unduly concerned about investing in white elephant projects like highways, expressways, development of tourist spots. Working under scrutiny. To save power, authorities have implemented daily blackouts across the country, with blackouts lasting from five to seven-and-a-half hours a day. Due to power outages during the day and at night, the students face difficulties in the exams, and these power cuts cause great stress to the education of the students who are studying through the internet.
The already sluggish economic situation in Sri Lanka is felt as an echo of the tense situation between Ukraine and Russia due to the preparations for the Russo-Ukrainian war. The Russian invasion of Ukraine in 2022 has worsened the country's economic disaster, as Russia is Sri Lanka's second largest market for tea exports and Sri Lanka's tourism sector heavily benefits the two countries. As a result, the Ukrainian crisis has hampered Sri Lanka's economic recovery and both the tea and tourism sectors have been hit hard.
Spontaneous and organized protests by political parties and non-party organizations against government blunders in economic matters have been reported in many areas.
Tens of thousands of supporters of the opposition Sajith Premadasa-led United People's Shakti protested in front of the President's office on March 16, demanding the President's resignation.
On March 30, when Namal Rajapaksa arrived for the inauguration of a sports ground in Bandarawela, Namal Rajapaksa avoided the venue as angry locals staged a road blockade demanding fuel. The mayor opened the stadium instead.
On March 31, a large group of protesters gathered around Gotabaya Rajapaksa's residence in Mirihana, protesting the power cut for more than 12 hours a day. The protest was initially a spontaneous, peaceful protest by citizens, with the police firing tear gas and water cannons at the protesters. The protesters then set fire to the bus carrying the riot control forces. Following this, the government announced a curfew in Colombo. Simultaneous protests were also announced on the Kandy-Colombo highway. The road was blocked by protesters. The government accused the protesters of being members of a terrorist group and began arresting them. Candle-carrying protests continued in several areas, while rejoicing and ar-banging protests were also reported.
In May 2022, the Rajapakses' own home was torched by protesters. Mahinda Rajapaksa stepped down as Prime Minister in May 2022 amid protests, but Gotabaya Rajapaksa refused to resign as President. The protests continued.
On July 9, protesters ransacked the President's official residence and set fire to Prime Minister Wickremesinghe's private residence in Colombo.
Foreign aid
In January 2022, India extended the deadline for a $400 million transfer and deferred a $500 million Asian Settlement Union settlement.In addition, India extended a new loan worth $500 million for the purchase of petroleum products.
On March 17, 2022, Sri Lanka received another USD 1 billion loan from India to purchase essential goods such as food and medicine. The loan was granted after India and Sri Lanka formally signed a loan agreement during Finance Minister Basil Rajapaksa's visit to New Delhi.
