Thousands of Sri Lankans have taken to the streets in recent days to seek President Gotabaya Rajapaksa’s resignation. With food shortages, increasing prices, and power outages, the island nation is experiencing its greatest economic crisis since obtaining independence from Britain in 1948.
Due to a lack of foreign currency, Sri Lanka’s central bank has announced that it will have to stop making payments on its massive foreign debt. The government is now pleading with the International Monetary Fund for a rescue.
What is the cause of Sri Lanka economic crisis?
Sri Lanka’s troubles stem from the fact that its foreign exchange reserves have nearly depleted. It means it can’t afford to pay for staple food and fuel imports, resulting in severe shortages and sky-high costs.
The government blames the pandemic, which nearly wiped off Sri Lanka’s tourist industry, which is one of the island’s most lucrative sources of foreign revenue. It further claims that a string of devastating bomb attacks on churches three years ago scared tourists away.
Many experts, however, believe that economic mismanagement is to blame. Sri Lanka chose to focus on its own markets rather than selling to overseas markets after its 30-year civil war ended in 2009. As a result, export revenue remained low, while import costs continued to rise.
Every year, Sri Lanka imports $3 billion (£2.3 billion) more than it exports.
In addition, the government built up massive debt to support what opponents have labeled as pointless infrastructure projects. Sri Lanka had $7.6 billion (£5.8 billion) in foreign currency reserves at the end of 2019. However, by March 2020, its cash reserves had plummeted to just $1.93 billion (£1.5 billion).
How did the government respond?
When President Rajapaksa took office in 2019, he planned to lower taxes. As a result, the government has less money available to buy foreign currency on international markets in order to boost its reserves.
When currency shortages in Sri Lanka became a major issue in early 2021, the government tried to stem the flow of foreign currency by prohibiting all chemical fertilizer imports and advising farmers to adopt organic fertilizers instead.
Crop failures were prevalent as a result of this.
Sri Lanka had to import food from other countries, exacerbating the country’s foreign money shortage. Since then, the government has prohibited the entry of a wide range of “non-essential” goods, including vehicles, certain foods, and even shoes.
Cutting the value of a country’s currency is one approach to increase exports, but the Sri Lankan government refused to allow the rupee to decline in value against other currencies. The rupee plunged more than 30% against the dollar when it finally did so in March 2022.
How much foreign debt Sri Lanka must repay?
Sri Lanka’s government owes $51 billion (£39 billion) in foreign debt. It will have to pay $7 billion (£5.4 billion) this year to settle these loans, with similar amounts due in the future.
Sri Lanka’s central bank, on the other hand, has stated that it will not make any more foreign currency loan repayments unless it receives a bailout from the International Monetary Fund (IMF). It claims it needs to save its remaining foreign currency to buy necessities like petrol.
The first test of the country’s decision not to fulfill its debts will be if it makes a $1 billion payment due in July.
What is the political situation?
Early in April, mass protests erupted, with people demanding that President Rajapaksa resign, something he has refused to do.
People are enraged because the expense of living has skyrocketed. They are spending up to 30% more for food than they were a year ago, forcing some people to cut back not only on what they buy, but also on the number of meals they eat each day.
Fuel shortages have resulted in huge queues at gas stations, and the problem has also impacted public transportation. As the protests intensified, the president imposed a curfew, a harsh emergency decree, and a social media ban. He rescinded the measures after they failed to keep demonstrators off the streets.
President Rajapaksa then fired everyone in his government except his brother, Prime Minister Mahinda Rajapaksa. He also fired the central bank’s governor. The president has invited opposition lawmakers to assist in the formation of a new administration, but they have declined. Instead, more than 40 members of parliament from the ruling coalition have resigned.
What kind of assistance may Sri Lanka expect from other countries?
Sri Lanka’s government requested a bailout from the International Monetary Fund (IMF) in March, with talks set to begin in mid- to late-April.
Sri Lanka is receiving short-term assistance from India, which has been sending petroleum to the country on a $500 million credit line. China has agreed to swap the Lankan rupee for its currency, the renminbi, in order to boost Sri Lanka’s foreign currency reserves. Sri Lanka has also taken out loans from Japan and Bangladesh, among others.
Where are the protests?
Despite the emergency regulations, protests have expanded across the 22 million-strong country. Crowds have attempted to assault the residences of numerous key government figures since the weekend, and public dissatisfaction is at an all-time high.
Many of the protests have been peaceful, including a parade led by Catholic clergy and nuns in the capital.
What is going to happen next?
In terms of politics, the president’s elder brother, Mahinda Rajapaksa, might be replaced as prime minister, or hasty parliamentary elections could be held before the scheduled vote in 2025.
Despite the fact that the administration is now in a minority, there has been no indication that opposition legislators will attempt to overthrow it immediately with a no-confidence resolution. Opposition parties, on the other hand, have previously rejected Rajapaksa’s offer to join a unity government led by him and his brother.
What is the severity of the economic crisis?
Sri Lanka is struggling to service its mounting $51 billion international debt due to a serious lack of foreign money, with the pandemic jeopardizing important tourism and remittance revenue. As a result, there have been exceptional shortages, with no indication of the economic crisis abating.
Government mismanagement, years of accumulated debt, and ill-advised tax cuts, according to economists, have aggravated Sri Lanka’s dilemma. The government was obliged to close three of its diplomatic missions in Norway, Iraq, and Australia due to a lack of foreign exchange. In January, three more, in Nigeria, Germany, and Cyprus, were closed.
A doctors’ group also warned the administration that there was a critical scarcity of drugs that might bring the health system to its knees. In a letter to the health ministry, it warned that “failure to provide a continuous and adequate supply of key medical pharmaceuticals may lead to the collapse of the entire health system.” “This will put our residents’ lives in jeopardy,” the Government Medical Officers Association said. “We are already in the midst of a historic crisis.”
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Information Source: BBC, The Guardian, Reuters
