Sri Lanka's Economic Crisis Explained

Massive protests have broken out throughout Sri Lanka seeking the removal of the Rajapaksa Government. According to the reports the country currently faces an external debt of 35 Billion USD and has seven billion dollars to be paid shortly.





Here’s a complete account of the unfortunate economic crisis faced by the country.


Go Gota Go Protest Take Center Stage: Shortage of basic essentials, protests by an enraged public, Sri Lanka on its brink

India’s neighboring island country, Sri Lanka is facing the worst economic crisis in its history since independence in 1948.


Essential commodities such as rice, sugar, and others are being sold at record-high prices due to shortage. Last month, the government announced the cancellation of exams due to a shortage of paper which impacted nearly 4.5 million students.


People have to stand in long queues for fuel and cooking gas. Additionally, the country has also witnessed long-hour power cuts. 40 percent of its electricity, as reported by The Times of India, runs by hydropower plants. Due to a shortage of rain, the reservoirs face rapid depletion of water sources. The government temporarily banned social media mediums countrywide to combat the coordination of anti-government activities in the country. A few days later, the ban was removed after receiving severe backlash from the public. Many media outlets are reporting that several Sri Lankans are reaching the coast of Tamil Nadu via boats to escape the country.


Communities that were once divided on communal grounds are today sticking together and protesting for the removal of President Gotabaya Rajapaksha. Children as young as 11 have joined the protester's movement.


Moreover, in view of the drug shortages in the country, the medical fraternity has declared a health emergency.


Though the Indian external affairs ministry has not issued any advisory for its citizens seeking travel approval to the neighboring nation. It is best for travelers to cancel their plans for leisure or business trips owing to the country’s internal disturbances.


Meet the culprits




Economists have pointed out that the economic crisis is a result of decades-long mismanagement of the country’s finances. The short paragraphs below unveil who these leaders are:


Mahinda Rajapaksha, the prime minister in question hails from a powerful and well-connected political family. His three brothers and son held important portfolios in the cabinet. His elder brother is the president of Sri Lanka. Mahinda Rajapaksha was the President from 2005 to 2015 and ended the 25-year-long Sri Lankan Civil War in 2009. It has been reported that he refused local and international inquiries into war crimes committed during the insurgency period in the country. Moreover, his leadership had turned extremely authoritative. During his tenure, he asked for money from the Chinese for infrastructure investment in the country, eventually leading the country into the Chinese debt trap. During his tenure, he consolidated a solid position in the political landscape and even changed constitutional rules to accommodate his third term, and appointed his siblings into leading significant portfolios.


Gotabaya Rajapaksha, the president of Sri Lanka also holds the post of secretary to the defense minister overlooking the activities of the armed forces. He has presided over many policies that were passed without giving a second thought and just to appease the masses for their short-term benefits. He is known as “the terminator” and had allegedly played an active role in the disappearances and killings of various opposition leaders, activists, and journalists according to media reports.


Basil Rajapaksa, finance minister, nicknamed ‘Mr. Ten percent, as allegedly, claimed he takes 10 percent from government contracts. His brother, the president, sacked him from his post while Basil was scheduled to leave for the US to converse with the IMF for bailouts. There were various money laundering charges against him which were subsequently quashed by the president when he came in power. His replacement Ali Sabry handed in his resignation a day after taking the post.


Chamal Rajapaksha was elected as the speaker of the parliament in April 2021. He was given the responsibility of the Agriculture and Irrigation portfolio.


In 2018, the Sri Lankan government witnessed a political upheaval that heavily impacted its economy. The inflation was controlled when several policies recommended by the IMF were adopted, but they were reversed when the Rajpaksha Family gained control post-2019 elections. These policies were ‘freebies promises’ made by the leaders and were implemented for mass appeasement. There was a period wherein the country went into a three-week period of parliamentary recess due to the presence of two concurrent prime ministers as the former and disposed prime minister refused to leave his seat. The former prime minister often patted his own back, stating that his government was responsible for the stability of the Sri Lankan economy.


Top of the ice-berg policies which crippled Sri Lanka


Several economists had predicted the severe impact of Rajapaksha’s rule on the country’s future due to the leader's proximity with the Chinese government. However, apart from some obvious factors affecting the growth of the country such as the Pandemic, and terrorism: the repayment clauses played a severe role too. Let’s revisit them step by step.


The government over the years issued numerous sovereign bonds. Sovereign bonds are issued when a government wants to pay off old debt or pay for government-run programs. Moreover, they failed to gain international investment in the country. Major faults also lay in their contracts issued to countries like China. The country has issued short-term payments with high-interest rates on contracts in hope that their export products will be high. Unfortunately, this failed to occur. In 2018, the country was not able to pay back China which forced them to sign a 99-year lease for a port in Beijing.


Despite multiple warnings from Indian Intelligence Agencies, Sri Lanka was left to feel the shocks of multiple terrorist attacks in April 2019 during the Easter service. The radical Islamist group targeted major five-star hotel chains, churches, and luxury residences as a supposed response to the Christchurch Bombings in New Zealand. The incident, followed by the global pandemic heavily impacted the tourism industry which contributes 10 percent to the country’s GDP.





A few days after coming into power in November 2019, President Gotabaya Rajapksha declared a tax removal and reduction on a series of imports. He introduced a cut on telecommunication taxes by 25 percent and reduced the taxes on consumption goods from 15 to 8 percent. Overall, the taxes were cut by nearly a third. During Gotbaya’s presidential campaign, he promised to change the face of Sri Lanka’s agricultural landscape by banning chemical fertilizers and introducing organic farming. The government willingly provided all the equipment for organic farming free of cost to the farmers. The main idea being the government was trying to save their foreign reserves on the import of chemical fertilizers. The yield of organic farming is 20 percent lower than that of traditional farming. Moreover, the region witnessed an exponential increase in the prices of crops. In November 2021, the organic agriculture policy failed in the state with the president blaming the ‘chemical fertilizer mafia’ for promoting chemicals to the farmer and improper education.





In February 2022, the Russian government declared war on Ukraine and invaded the region. Due to an ongoing war, the economies of developing nations including Sri Lanka were impacted.


On 14th March 2022, Sri Lanka printed millions of its currency and made a record. The excessive printing resulted in inflation to sore and depleted the value of the Sri Lankan Rupee further. According to reports, a delegation from the IMF visited the country in December 2021 and refrained the country from printing money. On 3rd and 4th April, the Union Cabinet Ministers including Namal Rajapaskah resigned from their posts Ali Sabry, who took the post of the new Finance Minister resigned a day after taking the office. With ministers resigning and the opposition refusing to join the government in solidarity with the agitating public, the Rajapaksha family is losing its majority in the parliament.


On 8th April, the government announced the establishment of an expert panel that would come up with to recover the economy in an ‘inclusive and sustainable way’. Additionally, 25 percent tax was imposed on companies and individuals earning more than 2 billion Sri Lankan rupees in the financial year 2021-22.


The Ministry of Foreign Affairs announced that they would close their embassies in Norway, Iraq, and Australia on April 30th.


International Monetary Funds and Solutions for bailouts

(This section will be updated as The Sri Lankan delegation will visit the US between the 19th -24th of April seeking a bailout)


At this moment, the country is not focusing on repaying the external debt that it owes to several banks and countries like India, China, and Japan. Rather, it is optimizing its limited resources and creating revenue to import essential items. For sustaining itself for the next six months by restoring stocks of essential items, Ali Sabry highlighted the country’s need for estimation of three to four billion USD.


The bailout is external financial assistance required by a country when it faces threats of bankruptcy. Having pros and cons, it becomes a necessary evil as an unstable financial environment can have major repercussions on the lives of millions of people.


On 15th April, the Stock exchange commission announced a week-long break and suspended activities to explain to investors the situation in the country.


Overnight, the prices of oil increased in the country on Monday 18th April. Additionally, China has assured Humanitarian assistance to the island nation.




 

Some useful links to read more:
  1. https://timesofindia.indiatimes.com/world/south-asia/mahinda-rajapaksa-the-charismatic-leader-both-loved-and-hated-for-role-in-ending-bloody-civil-war-in-lanka/articleshow/72159860.cms

  2. https://www.cnbc.com/2018/09/12/sri-lanka-prime-minister-my-country-isnt-as-vulnerable-as-others-say.html

  3. https://smallbusiness.chron.com/credits-negative-accounting-80507.html

  4. https://www.youtube.com/watch?v=btZoDeB0UcY

  5. https://www.cnbc.com/2022/03/04/sri-lankas-economy-inflation-and-debt-burden-worsen-economic-crisis.html

  6. https://economynext.com/sri-lanka-to-hold-rupee-steady-cb-governor-90007/

  7. https://www.investopedia.com/terms/s/sovereignbond.asp

  8. https://timesofindia.indiatimes.com/world/south-asia/newly-elected-sri-lankan-government-announces-tax-cuts/articleshow/72264615.cms

  9. https://www.swissinfo.ch/eng/is-100--organic-farming-a-revolution-too-far-/47492106


 

Credits

All the remaining designs have been taken from Canva and the image is taken from Google images.

 
About the author

The author of the above article, Mehak Mathur, is pursuing the Bachelor Of Strategic Communication and Journalism degree at Mumbai University.


“My main motive is to provide people with factual and relevant information and hope to ignite their passions, help them connect with one another conducting insightful discussions and see the bigger picture.”

 



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