Economic Crisis in Sri Lanka

Written by Maryam Yasmeen 11:48 am Articles, Current Affairs, International Relations, Published Content

The Economic Crisis in Sri Lanka Explained

Amid the food, fuel, and medicine shortages in Sri Lanka, the island paradise broke out into protests which soon turned violent. For months, the situation in Sri Lanka has been spiraling out of control. Maryam Yasmeen takes a look at the triggering factors of the crisis that led to President Gotabaya Rajapaksa’s resignation. The 2022 Sri Lankan crisis is far more than just an economic matter. The state has been deeply influenced by political dysfunctionality, administrative negligence, ethnonationalism, and the Covid-19 pandemic.
About the Author(s)
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Maryam Yasmeen is a student of international relations at Kinnaird College, Lahore. She is an avid reader and an occasional writer aiming to add to her knowledge.

Introduction

One familiar name making it to the headlines these days is “Sri Lanka” with its news of daily power outages, large-scale street protests, and governmental ministers stepping down en-masse. The country has a crippling economy with a record of 54.6% inflation. With skyrocketing prices, Sri Lanka is facing a massive economic crisis; the discontent being the worst economic downturn since its independence.

The riots began in late March in the capital city of Colombo, as the people spread across the country to sporadically demonstrate against increasing inflation. But the anger has been simmering for many years, making this economic crisis not unprecedented but an extension of underlying political turmoil.

The trouble is dated to have been incepted three years back, when increased fuel prices and shortages in food and medicines alongside constant daily power cut-offs amidst the pandemic uncertainty, plunged the state of Sri Lanka into settling unrest. What came following was a picture of civil disturbance, as series upon series of protests began. People began flooding the streets, escalating the whole drama in a matter of days with the occupation of both the Presidential Palace and the prime minister’s residence.

The once island paradise became a “state in crisis,” a state with an instilled civil war, a state in trouble. Sri Lanka was called “bankrupt” since it’s drowning under the currents of an external debt of 51 billion dollars with over 500,000 of its population living below the poverty line.

The Road to Crisis

The crisis in Sri Lanka was not a result of an overnight turnout but had been years in the making, with roots going back to the economic and political troubles of 2018 and beyond. It is rather difficult to pinpoint the exact moment of its activation, but it is worth noticing that the disturbance in domestic politics, followed by a global pandemic, essentially ignited its ascend into the crisis it reflects today. This article, in its essence, aims to entail a comprehensive history of the road behind this economic-political unrest and the causes of its trigger.

Historical Background

The history of Sri Lanka is a history of governmental mismanagement, particularly over the course of the last decade – during which it has tumulted under the growing pressure of foreign debts. Over the last ten years, the government of Sri Lanka has borrowed vast sums of money to fund public service, only to be hammered time and again into a crumbling economy.

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On paper, the GDP was growing but in reality, the country was surviving on loans and debt with a disturbing balance of payments. Such political dysfunctionality alongside administrative negligence, deep-rooted ethnonationalism, and both natural and man-made disasters have harvested this long over-due crisis which finally opened out in 2020 with the pandemic providing the hardest blow. The very recent fuel crisis has only added further agitation and led to civil strifes and public outbursts.

Triggering Factors

Essentially, there are several compounding factors that have led to such a sorry state of affairs in Sri Lanka, including the internal political dysfunctionality, divisive legacy of Rajapaksa politics, weak governmental financing, ill-timed tax cuts, soaring inflation, skyrocketing prices, and increasing foreign debt, all pitched together with Covid-hit tourism.

Beginning from the 2018 constitutional crisis and followed by the 2019 Easter bombings, a nationwide policy shift in farming, coupled with economic mismanagement by successive governments, Sri Lanka has faced multiple social, economic, and political hardships in the last several years.

With a national expenditure that surpasses the national income and inadequate levels of production and trade, Sri Lanka’s public finances were weakened. Increased taxation i.e., from 8% to 15%, enacted by the Rajapaksa administration, worsened the social situation.

In addition, Covid-19 provided a hard blow to the tourism-based economy of Sri Lanka. It was in fact the hardest of all the factors, wiping Sri Lanka’s revenue base and thus leading to a severe economic breakdown. Such doomed circumstances of massive economic deficit in turn paved the government to further increase taxes and suspend payments.

The move backfired, thus further decreasing the governmental revenue as it readily lost access to overseas markets. Foreign remittances dropped by 61.6%, leading the state of Sri Lanka to fall back hard on its foreign exchange reserves. Its reserves shrank from $7.6 billion in 2019 to $1.9 billion by March 2022.

This was followed by the floating of the Sri Lankan rupee in March 2022, an attempt by the government to devalue the currency by up to 15% to qualify for yet another loan from the IMF. this only made things worse by plunging the country into a crisis with soaring high prices of everyday essentials like food, medicines, and fuel.

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For the people, their lives turned upside down, into an endless cycle of waiting in long queues for food, fuel, and healthcare essentials that weren’t available in the first place. Runaway inflation maximized by 54.6 %. As per the Central Bank of Sri Lanka, it was to reach 70% by March. It, therefore, set off an aggressive response from the public which wanted answers as to where the official government funds went. Many analysts have observed that this state of affairs reached such a level due to incompetency and corruption within the governmental circles.

Civil Unrest

The picture turned hastily violent as protests began; an enraged population took to the streets in late March 2022 and stormed the governmental institutions, demanding instant government action and accountability. On 31 March, frustration and anger erupted as the protests began amidst the food, fuel, and medicine shortages. These protests hastily grew violent with masses demonstrating outside the president’s private residence, calling for his resignation.

The government replied with police action, ordering the dismissal of the demonstrators via the use of tear gas and water cannons. Later, a 36-hour curfew was imposed and a nationwide public emergency was invoked on 1st April. Orders were given to detain the protestors and warrants were issued to censor and block social media platforms.

Such enraging actions aimed to put the protests to a halt, but instead, they only added further agitation. The demonstrations kept on in defiance of the curfew, thus prompting strict police action and hundreds of arrests. Protests, that began as peaceful, turned ugly leading to a state of civil unrest, with the public hungry for official resignations.  

On 3rd April the entire cabinet was effectively dissolved as 26 of the ministers stepped down. On 5th April, the emergency ordinance was revoked in the face of such chaos; the president attempted to reshuffle the ministries but only to end further desertions. In May, substantial efforts were to be undertaken to restore the government followed by a collaboration with the IMF in June.

The public pressure eventually mounted, causing President Gotabaya Rajapaksa to formally resign in July. On 13th July Rajapaksa resigned and two days later, the cabinet and governmental officials fled the country leaving in their wake a trail of a broken economic and political image amidst growing social upheaval and anxiety within the country.

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On 21st July, Ranil Wickremesinghe was sworn in as the new president. He filled the vacuum left behind by Rajapaksa and formed an interim government. While making calls amidst the political and economic turmoil, he has ultimately faced massive backlash for the economic collapse the country seems to be engaged in for months. With slogans such as “Power of the People,” the public of Sri Lanka is seamlessly engaged in protests against the interim government as well.

It has been over three months since the protests started in Sri Lanka. People have been witnessed to be enraged over the economic collapse. Various efforts have been engaged to contain the crisis to prevent it from going down the road to a civil war, but with no success so far. As per recent resources, military raids have begun upon the protestors. According to experts, this economic turmoil is here to stay for at least several years. Joint aid from foreign sources is the only direct way out of such a catastrophe.

Analysis

Widely known as an “island paradise” with a rich and diverse culture, Sri Lanka is now a state in crisis, submerged in civil unrest. Once a country of dreamy landscapes and a vibrant history, it is now a country in ashes, facing a tumultuous present and caught up in a civil uproar amidst the deepening economic crisis.

To state that the crisis in Sri Lanka is purely an economic crisis would be an understatement. This is a crisis that had been years in the making with governmental mismanagement, corruption and nepotism, and an increasing imbalance of payments contributing to public dissatisfaction over the course of years.

The recent economic inflation was only a cherry on top, igniting the already lit spark and ultimately causing the cake to topple. Such is the reflection of Sri Lanka today; with a debt-laden economy, violent protests, and a president on the run, the country is staring at a grim future.


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