Sri Lanka’s Economic Emergency: What Has Been Going On?
Updated: Aug 2, 2022
Sri Lankan people have been experiencing extremely harsh food, electricity, and fuel shortages after a long and ongoing economic crisis struck the nation. The series of events that led up to this brutal way of living has generated a debt of over $51 billion for the nation, creating many protests regarding the circumstances.
With President Gotabaya Rajapaksa fleeing the country and resigning, the Sri Lankan nation is now in a critical state of emergency. This could be the most intense economic crisis Sri Lanka has faced in almost seven decades.
Recent Events Leading to Crisis
COVID-19 Pandemic & Lack of Tourism
After the COVID-19 pandemic hit in 2020, Sri Lanka’s tourism industry was negatively impacted due to the lack of travel to the nation. They rely heavily on tourists to help keep their economy up and functioning, making it one of their most lucrative businesses.
Nearly 40,000 tourism-related jobs were lost due to the pandemic, which dramatically affected the nation’s financial wealth and ability to pay foreign debt.
Fertilizer & Product Shortages
Following the pandemic, 2021 introduced a ban on fertilizers from abroad to balance and combat the exhaustion of foreign currency reserves. However, this ban led to more issues due to the lack of local fertilizers available. Relying heavily on local products created an extensive shortage of crops, which then created more demand for imported goods, causing reserves to become even more depleted.
Sri Lanka relies heavily on imported goods; this is one of the main reasons they are experiencing such a crisis.
Along with extensive crop scarcity, Sri Lanka has been experiencing fuel, energy, medicine, and food shortages. Some are queuing for successive days to obtain food and fuel. Additionally, with high global fuel prices and the Ukraine-Russia war affecting grain availability, the nation has been struck with an alarming economic situation.
Protests & Other Implications
Because of the financial security crisis that the Sri Lankan people have experienced, 2022 has been full of massive protests around the country. Along with fighting for their rights, many protesters were demanding that President Gotabaya Rajapaksa step down from office due to his lack of knowledge and help during the trivial times. Many have blamed him for the financial crisis that Sri Lanka has been facing.
The protests recently led to the storming of government buildings in the capital Colombo, one of which was the residence of Gotabaya Rajapaksa. Because of these protests, the president fled the country and officially announced that he had stepped down from office and the prime minister, Ranil Wickremesinghe, would be acting president. However, many people were not excited about this plan of action.
Protests have since been occurring, demanding that Wickremesinghe be taken out of office as well since he is,
"just as bad and corrupt as Gotabaya Rajapaksa and does not have any support from the people,”
according to Kasun Viraj, a student protester.
Ranil Wickremesinghe has been elected the new President of Sri Lanka this past week. He has been serving as the interim for some time now. With a new President in place, Sri Lankans will desperately hope that times become better.
History of Economics
Sri Lanka has gradually developed a highly diversified economic system. Both private and state sectors are engaged in the production process, making it a mixed economy.
Additionally, Sri Lanka has a history of partaking in and encouraging foreign investments. They are known to be a liberalized market since the “second era of Sri Lankan development” altered the strictly controlled government values that were instituted during the first era of development.
The transition to a liberalized, free market system has benefited the economy.
However, inflation, the cost of the civil war, and the diminishing value of the Sri Lankan currency have dramatically impacted the cost of living in Sri Lanka. Many have relied on government assistance programs to get by. On top of these circumstances, balance-of-payment issues have been a familiar concern for Sri Lanka since the 1950s.
Sri Lanka's problems have accumulated over the years due to “economic mismanagement.”
Summary of Foreign Debts
With the amount of debt Sri Lanka has accumulated, the trust that other national lenders have towards them might be sparse. The economic instability they have been enduring has racked up a debt of nearly $51 billion.
Most of this debt is owed to market borrowings, adding up to 47% of the issue. Asian Development Bank is the next highest lender, averaging 13% of their debt. China and Japan are equally up next at 10% each, with the World Bank and other lending entities following closely behind at 9% each. The last bit of debt is owed to India, only 2%.
Because of the amount owed to these lenders and the lack of foreign exchange reserves, Sri Lanka is scraping to pay for needed imports that keep their system functioning properly.
Countries Assisting Sri Lanka
India and China have graciously agreed to help Sri Lanka during their time of need. China, one of its main lending countries, is in the midst of discussing loan restructuring, while India has offered around $1.9 billion to help ease the crisis. They have mainly been counting on India to stay afloat amid the situation, being a neighboring country.
Additionally, Sri Lanka has recently been conversing with the United States, World Bank, and Asian development to implement short-term loans until they have a functioning government and support from the IMF.
The International Monetary Fund, also known as the IMF, is considering a loan of $3 billion to help the Sri Lankan nation get its systems up and running again. However, this plan would need a new, stable government in place that could raise taxes and interest rates to assist with the deal's funding.
A new leading committee would ensure they can continue and follow through with the IMF’s negotiations. Until new management is in office, a bailout might be postponed.
As of now, the main plan of action for Sri Lanka is to get help from the IMF to restructure the common debt owed. Doing so will grant them more trust from foreign lenders, make payments more manageable and help ease the hit of the crisis on Sri Lankan citizens.
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Shiana Irlbeck is a content writer for the International Youths Organization for Peace and Sustainability. She also holds a BS in Psychology from Iowa State University. Inputs and Edits by Sovena Ngeth.