Prime Minister Ranil Wickremesinghe, who took office in May, was stressing the monumental task he faced in turning around an economy he said was headed for “rock bottom.” On Saturday, both he and President Gotabaya Rajapaksa agreed to step down amid mounting pressure from protesters who stormed both their residences and set fire to one of them.
Sri Lankans are skipping meals as they endure shortages and lining up for hours to try to buy scarce fuel. It’s a harsh reality for a country whose economy was growing fast, with a growing and comfortable middle class, until the latest crisis deepened.
HOW SERIOUS IS THIS CRISIS?
The government is $51 billion in debt and unable to pay interest on its loans, let alone put a dent in the amount it borrowed. Tourism, a major driver of economic growth, has soared due to the pandemic and security concerns following terrorist attacks in 2019. And its currency has collapsed by 80%, making imports more expensive and exacerbating already high inflation. out of control, with food costs increase by 57%, according to official figures.
The result is a country headed for bankruptcy, with almost no money to import gasoline, milk, cooking gas and toilet paper.
Political corruption is also a problem. not only has it played a role in wasting the country’s wealth, it also complicates any economic rescue for Sri Lanka.
Anit Mukherjee, a policy fellow and economist at the Center for Global Development in Washington, said any aid from the IMF or World Bank should come with strict conditions to ensure the aid is not mismanaged.
However, Mukherjee noted that Sri Lanka is located in one of the busiest shipping lanes in the world, so letting a country of such strategic importance collapse is not an option.
HOW DOES IT AFFECT REAL PEOPLE?
Tropical Sri Lanka normally has no shortage of food, but people are hungry. The UN’s World Food Program says nearly nine in 10 families are skipping meals or otherwise skimping on food, while 3 million are receiving emergency humanitarian aid.
Doctors have taken to social media to try to get critical supplies of equipment and medicine. More and more Sri Lankans are looking for passports to go abroad to look for work. Government employees were given an extra day off for three months to give them time to grow their own food.
In short, people are suffering and desperate for things to improve.
WHY IS THE ECONOMY IN SUCH A DAMAGE?
Economists say the crisis stems from domestic factors such as years of mismanagement and corruption.
Much of the public anger has focused on President Rajapaksa and his brother, former Prime Minister Mahinda Rajapaksa. The latter resigned in May after weeks of anti-government protests that eventually turned violent.
Conditions have worsened in recent years. In 2019, Easter suicide bombings at churches and hotels killed more than 260 people. He destroyed tourism, a major source of foreign exchange.
The government needed to boost its revenue as external debt for major infrastructure projects soared, but instead Rajapaksa pushed through the biggest tax cuts in Sri Lanka’s history. The tax cuts were recently reversed, but only after creditors downgraded Sri Lanka’s ratings, preventing it from borrowing more money as its foreign reserves sank. Then tourism leveled off again during the pandemic.
In April 2021, Rajapaksa suddenly banned imports of chemical fertilizers. The push for organic farming caught farmers by surprise and decimated staple rice crops, driving prices higher. In order to save foreign exchange, imports of other items considered luxuries were also banned. Meanwhile, the war in Ukraine has pushed food and oil prices higher. Inflation was close to 40% and food prices rose by almost 60% in May.
WHY DID THE PRIME MINISTER SAY THE ECONOMY CRASHED?
The stern statement in June by Wickremesinghe, who is in his sixth term as prime minister, threatened to undermine any confidence in the state of the economy and did not reflect any concrete new development. The prime minister appeared to underline the challenges facing his government as it seeks help from the IMF and faces criticism for a lack of improvement since taking office weeks earlier. The comment may have been intended to try to buy more time and support as it tries to get the economy back on track.
The finance ministry said Sri Lanka only had $25 million in usable foreign exchange reserves. This left it without the means to pay for imports, let alone repay billions in debt.
Meanwhile, the Sri Lankan rupee has weakened in value to around 360 per US dollar. This makes the cost of imports even more prohibitive. Sri Lanka has suspended repayment of about $7 billion in foreign loans maturing this year out of $25 billion due by 2026.
WHAT IS THE GOVERNMENT DOING ABOUT THE CRISIS?
So far Sri Lanka has floundered, supported mainly by $4 billion lines of credit from India. An Indian delegation came to the capital, Colombo, in June for talks on more aid, but Wickremesinghe warned against expecting India to keep Sri Lanka afloat for long.
“Sri Lanka puts last hope in IMF,” read a June headline in the Colombo Times. The government is in negotiations with the IMF on a bailout plan, and Wickremesinghe said he expects to have a preliminary agreement later this summer.
Sri Lanka has also sought more aid from China. Other governments such as the US, Japan and Australia have provided several hundred million dollars in support.
Earlier in June, the United Nations made a global public appeal for help. So far, the projected funding barely scratches the surface of the $6 billion the country needs to stay afloat over the next six months.
To address Sri Lanka’s fuel shortage, Wickremesinghe told The Associated Press in a recent interview that he would consider buying oil at a deeper discount from Russia.
Kurtenbach, the AP business editor for Asia, contributed from Bangkok.
