Sri Lanka’s economic crisis explained

Experts say the crisis has dragged on for years, spurred on by a little misfortune and much government mismanagement.

Over the past decade, the Sri Lankan government has borrowed huge sums from foreign lenders to fund public services, said Murtaza Javerjee, head of the Colombo-based Advocata Research Centre.

This borrowing spree has coincided with a series of hammer blows to the Sri Lankan economy, from both natural disasters – like heavy monsoons – to man-made ones, including government bans on chemical fertilizers that have decimated farmers’ crops.

Facing a massive deficit, President Gotabaya Rajapaksa cut taxes in a doomed attempt to stimulate the economy.

But the move backfired, instead hurting government revenue. This prompted rating agencies to downgrade Sri Lanka to levels close to default, which means the country has lost access to overseas markets.

Sri Lanka then had to taper off its foreign exchange reserves to pay off government debt, reducing its reserves from $6.9 billion in 2018 to $2.2 billion this year. This affected imports of fuel and other necessities, driving up prices.

On top of that, in March the government floated the Sri Lankan rupee – meaning that its rate was set based on demand and supply in the foreign exchange markets.

The move appears to be aimed at reducing the value of the currency to become eligible for a loan from the International Monetary Fund (IMF) and encouraging remittances.

However, the depreciation of the rupee against the US dollar only made matters worse for common Sri Lankans.

What does this mean for people on Earth?

For Sri Lanka, the crisis has turned their daily lives into an endless cycle of waiting in queues for essential goods, many of which are rationed.

In recent weeks, stores have had to close because they cannot operate refrigerators, air conditioners or fans. Soldiers are stationed at gas stations to calm customers, who line up for hours in the sweltering heat to fill their tanks. Some people even died while waiting.

One mother in the capital, Colombo, told CNN she was waiting for propane to be able to cook meals for her family. Others say the cost of bread has more than doubled, while taxi and taxi drivers say the fuel rations are too meager to earn a living.

Some are stuck in an impossible situation – they have to work to feed their families, but they also have to queue for supplies. A street sweeper with two young boys told CNN she was quietly running away from work to join the dining classes, before speeding up again.

Even members of the middle class with savings are frustrated, fearful of running out of necessities like medicine or gas. Life is made more difficult by frequent blackouts that plunge Colombo into darkness, sometimes for more than 10 hours at a time.

What happens to the protests?

Protesters in Colombo took to the streets in late March, calling for government action and accountability. Public anger and frustration erupted on March 31, when protesters threw stones and set fires outside the president’s private residence.

Police used tear gas and water cannons to disperse the protests, and imposed a curfew for 36 hours afterward. President Rajapaksa declared a nationwide state of public emergency on April 1, giving authorities powers to detain people without a warrant, and block social media platforms.

But protests continued the next day in defiance of a curfew, prompting police to arrest hundreds of protesters.

The protests continued in the days that followed, although they remained largely peaceful. On Tuesday evening, crowds of student protesters surrounded Rajapaksa’s home again, and demanded his resignation.

The emergency law was repealed on April 5.

What happens to the cabinet?

The entire Cabinet was effectively dissolved on 3 April due to mass resignations by senior ministers.

Some 26 ministers resigned this weekend, including the president’s nephew, who has criticized the apparent blackout on social media as something he will “never condone”. Other key figures, including the central bank governor, also resigned.

Facing an administration in disarray, the president on Monday attempted a cabinet reshuffle that he had hoped to calm the opposition. Four ministers, including the finance minister, have been appointed to run the government temporarily, while several other ministers have been handed over to new positions in an effort to keep the country running “until a full government is formed,” according to a presidential press release.

But just a day later, the interim finance minister resigned – explaining that he took the position only because of “the many requests made”, and that he then realized that “new, proactive and unconventional steps must be taken.”

The amendment failed to stop further flight. The ruling Sri Lanka People’s Front coalition (also known as Sri Lanka Bodogana Peramuna) had lost 41 seats by Tuesday after members of several partner parties withdrew to continue operating as independent groups. The coalition was left with only 104 seats, and lost its majority in Parliament.

What did the government say?

President Rajapaksa issued a statement on 4 April but did not directly address the resignations, urging all parties to “work together for the sake of all citizens and future generations”.

“The current crisis was caused by several economic factors and global developments,” the statement said. As one of the leading democracies in Asia, solutions to this must be found within a democratic framework.

Later that day, when announcing the cabinet reshuffle, the president’s office released a statement saying that Rajapaksa had “sought the support of all the people to overcome the economic challenge facing the country”.

On April 6, whipped Prime Minister Johnston Fernando said during a parliamentary session that Rajapaksa would not resign “under any circumstances”. Fernando is a member of the ruling coalition and is seen as a close ally of the president.

Previously, Rajapaksa said he was trying to solve the problem, saying in a speech to the nation last month that “this crisis was not created by me”.

On April 1, Prime Minister Mahinda Rajapaksa – the president’s older brother and the former president himself – told CNN it was wrong to say the government had mismanaged the economy. Instead, Covid-19 was one of the reasons.

What then?

Sri Lanka is now seeking financial support from the International Monetary Fund and turning to regional powers that may be able to help.

During a speech last month, President Rajapaksa said he was weighing the pros and cons of working with the IMF and decided to pursue a bailout from the Washington-based institution – something his government has been reluctant to do.

Sri Lanka has also requested help from China and India, with New Delhi already issuing a $1 billion credit line in March – but some analysts have warned that such assistance could prolong the crisis rather than resolve it.

There is still a lot of uncertainty about what comes next; National consumer price inflation nearly tripled, from 6.2% in September to 17.5% in February, according to the country’s central bank. Sri Lanka will have to repay about $4 billion in debt over the remainder of this year, including a $1 billion international sovereign bond maturing in July.

The situation has alarmed international observers. At a press briefing on April 5, Liz Throssell, a spokeswoman for the United Nations High Commissioner for Human Rights, expressed concern about Sri Lanka’s official response.

Government-imposed curfews, social media blackouts, and police measures to break up protests could prevent or discourage people from expressing their grievances, she said, adding that these measures “should not be used to stifle dissent or impede peaceful protest.” She said the United Nations was watching closely, and warned against “the drift into militarization and the weakening of Sri Lanka’s institutional checks and balances”.