There are several reasons for this crisis, and the economic turmoil has sparked mass protests and violence across the country. This visual analyzes some of the factors that led to Sri Lanka’s current situation.
Timeline of events
Sri Lanka’s ongoing problems have flared up after years of economic mismanagement. Here’s a brief timeline that looks at just a few of the recent factors.
2009
In 2009, a decades-long civil war in the country ended and the government’s focus shifted to domestic production. However, the pressure on local production and sales, rather than exports, increased dependence on foreign goods.
2019
Unforeseen income tax cuts were introduced in 2019, leading to significant losses in government revenue, debilitating an already cash-strapped country.
2020
The COVID-19 pandemic has hit the world causing the closure of borders worldwide and stifling one of Sri Lanka’s most lucrative industries. Before the pandemic, in 2018, tourism contributed almost 5% of the country’s GDP and created more than 388,000 jobs. In 2020, tourism’s share of GDP had fallen to 0.8%, with over 40,000 jobs lost by that point.
2021
Recently, the Sri Lankan government introduced a ban on foreign-made chemical fertilizers. The ban was intended to deal with the depletion of the country’s foreign exchange reserves. However, with only local, organic fertilizers available to farmers, there was a massive crop failure and Sri Lankans were then forced to rely even more on imports, further depleting supplies.
April 2022
In early April this year, mass demonstrations calling for the resignation of President Gotabaya Rajapaksa erupted in the Sri Lankan capital, Colombo.
May 2022
In May, pro-government supporters brutally attacked protesters. Then Prime Minister Mahinda Rajapaksa, brother of President Rajapaksa, resigned and was replaced by former Prime Minister, Ranil Wickremesinghe.
June 2022
The government recently approved a four-day work week to allow citizens an extra day to grow food as prices continue to rise. Food inflation rose over 57% in May. In addition, rising grain prices caused by the war in Ukraine and rising fuel prices worldwide have played into an already dire situation in Sri Lanka.
The basic information
“Our economy has completely collapsed.” Prime Minister Ranil Wickremesinghe in Parliament last week. One of the main causes of the economic crisis in Sri Lanka is the dependence on imports and the amount spent on them. Let’s take a look at the numbers:
Total imports 2021 = US$20.6 billion Total imports 2022 (up to March) = US$5.7 billion
In contrast, the country’s most recently reported levels of foreign exchange reserves stood at a staggering $50 million, having fallen by a staggering 99% from $7.6 billion in 2019. Some of the top imports in 2021, according to the country’s central bank were:
Refined oil = $2.8 billion Textiles = $3.1 billion Chemicals = $1.1 billion Food & Beverage = $1.7 billion
Of course, without the cash to buy these goods from abroad, Sri Lankans face an increasingly drastic situation. In addition, the debt that Sri Lanka has built up is huge, further hindering their ability to build up their reserves. They recently defaulted on a $78 million loan from international creditors, and in total, they have borrowed $50.7 billion. The largest source of their debt is by far market borrowings, closely followed by loans taken from the Asian Development Bank, China and Japan, among others.
What it means
Sri Lanka is home to more than 22 million people who are rapidly losing the ability to purchase everyday items. Consumer inflation reached 39% at the end of May. Due to power cuts aimed at saving energy and fuel, schools are currently closed and children have nowhere to go during the day. Protesters calling for the president’s resignation have camped out in the capital for months, facing tear gas from police and a backlash from supporters of President Rajapaksa, but many have also responded violently to the pushback. India and China agreed to send aid to the country, and the International Monetary Fund recently arrived in the country to discuss a bailout. In addition, the government sent ministers to Russia to discuss a deal on discounted oil imports.
A forecast for low-income countries
Governments need foreign currency to buy goods from abroad. Without the ability to buy or borrow foreign currency, the Sri Lankan government cannot buy desperately needed imports, including staple foods and fuel, causing domestic prices to rise. In addition, loan defaults discourage foreign direct investment and devalue the national currency, making future borrowing more difficult. What is happening in Sri Lanka may be an ominous preview of what is to come in other low- and middle-income countries as the risk of debt distress continues to rise globally. The Debt Service Suspension Initiative (DSSI) was implemented by G20 countries, suspending nearly $13 billion in debt from the start of the pandemic until the end of 2021. Some DSSI and LIC countries facing high risk of debt distress include Zambia, Ethiopia and Tajikistan to name a few. Going forward, Sri Lanka’s next steps in managing this situation will either serve as a useful example for other countries at risk or a warning worth heeding.
Continuous updates
Since the publication of this article, the situation has changed significantly in Sri Lanka. The protesters got their original demand for President Rajapaksa’s resignation — both he and Prime Minister Wickremesinghe agreed to step down. This comes after protesters stormed the president’s palace causing him to flee the country. Note: The debt breakdown in the main illustration represents total external debt owed to foreign creditors, not total debt.
