Insights into Sri Lanka’s Growing Economic Crisis

From people dying in queues waiting to get fuel, to the shortage of paper for timely exams in schools and closure of embassies abroad by Rajapaksa government, all indicate a worsening economic situation in the Sri Lankan state. The Lankan rupee showed a record low against dollar, setting the exchange rate at 294 rupees in international market following the devaluation of currency by Colombo that has accelerated over months. Foreign reserves of the state since February accounts for approximately $2 billion USD, while the state is due to pay back $7.3 billion USD by the end of current fiscal year. The soaring economic conditions in the state have led to public anger leading to massive protests against the government, demanding a resignation from the party in power.

A multitude of factors partially contributed to the current crisis, the superimposition of which led to the current state of economic catastrophe. Mounting economic debt remains one of the core issues in Colombo, with market borrowings topping the chart with 47% of the debt, followed by Asian Development Bank with 13%, China and Japan accounting for 10% each, World Bank with 9% and India with 2% of the total debt (10% account for others; non-residential treasury bills/ bond holdings and state owned enterprises are excluded from this calculation). With the onset of global Covid-19 pandemic and its concomitant restrictions, the Lankan economy suffered a huge setback. Firstly because of a significant drop in tourists visiting the state, with 97.3% cutback as reported in 2021, the economic stability suffered immensely. It should be noted that tourism sector accounts for the third largest income generation source in Sri Lanka, leaving a substantial impact on the state’s economy. Secondly, the reduction of incoming remittances due to pay-cuts and restrictions overseas, led to a record ten year low of $5.49 billion. At the local level, even before the outbreak of the pandemic, the Lankan government had introduced substantial tax cuts, bringing the value from 15% to 8% in November 2019. Low export earnings, stock market damages and overlying debt servicing added to the current account deficit, with foreign reserves amounting to a mere $2 billion. The Sri Lankan government, amid already strained economic conditions, announced a donation of $5 million to SAARC Covid-19 Emergency Fund, along with Rs 100 million presidential package for Covid relief. The petrol price hike in international market following Western sanctions on Russian oil due to the latter’s military intervention in Ukraine further exacerbated an already dire situation of Sri Lankan economy, as the oil accounts for 20% of the state’s imports.

The worsening economic situation in the state has led to a popular demand for Rajapaksa’s government to step down, as a record 17.5% inflation has rendered most unable to pay for a shortening supply of items of daily use including food, medicine, fuel and electricity. The government has stationed military troops at gas stations to oversee fuel distribution amongst masses and quell concomitant unrest. Bars have also been implemented at the amount of purchase items to prevent stocking of food. The government has declared a 13-hour electricity blackout statewide due to lack of fuel (arising from government’s inability to purchase the fuel from international market) to power the thermal generators. Though hydropower accounts for 40% of Lankan electricity generation, the climate change factor played negatively to keep the water reservoirs undersupplied, further cutting down the state’s ability to produce and supply the much needed electricity. Furthermore, the shortage of medical supplies have led multiple hospitals to suspend routine diagnostic tests, with some suspending scheduled surgeries to save the supplies for emergency use only.

Though initially reluctant, Colombo is seeking assistance from IMF and World Bank, along with securing a $1.5 billion credit line from India and a possibly a $2.5 billion from China. The latter has responded positively to Colombo’s call for food aid, supplying 2000 metric tonnes of rice, along with a promise of further economic assistance to the state. The Lankan government has further sought debt rescheduling with creditors to tackle the current economic meltdown.

Amid increasing economic difficulties, most of international economics analysts foresee the situation getting worse in future, some even rendering the doom only a matter of countdown. The government may be able to quell the current crisis at hand with international assistance and loans in short term, but the situation in long term requires meticulous planning and handling for long term economic stability and welfare of the state.

Ansa Bint-e-Fayyaz
Ansa Bint-e-Fayyaz
Student of Bachelor in “Defense and Diplomatic studies” at Fatima Jinnah Women University.