Explainer: Why the Sri Lankan economy has collapsed and what lies ahead


Colombo: Sri Lanka’s prime minister says the island nation’s debt-laden economy has “collapsed” because it lacks the money to pay for food and fuel. With a shortage of cash to pay for such needs and its default on debt, it is seeking help from neighboring India and China and the International Monetary Fund (IMF).
Prime Minister Ranil Wickremesinghe, who took office in May, said he was emphasizing the monumental work he was facing to turn the economy into a “rock bottom”.
Sri Lankans are skipping meals as they suffer from shortages, standing in line for hours to try to buy scarce fuel. It is a harsh reality for a country whose economy is growing rapidly, with a growing and comfortable middle class, until the latest crisis deepens.
How serious is this crisis?
In tropical Sri Lanka there is usually no shortage of food but people go hungry. The UN World Food Program says about nine out of 10 families are dropping out of food or otherwise skimming for food, while 3 million are receiving emergency humanitarian assistance.
Doctors have resorted to social media to obtain vital supplies of equipment and medicines. Sri Lankans are demanding passports to go abroad in search of work.
Government employees have been given extra leave for three months so that they can grow their own food. In short, people suffer and are desperate to make things better.
Why is the economy in such dire straits?
Economists say the crisis is caused by domestic factors such as years of mismanagement and corruption, but also other problems such as the દે 51 billion rising debt, the impact of the epidemic and terrorist attacks on tourism and other problems.
Most people’s anger is centered on President Gotabaya Rajapaksa and his brother, former Prime Minister Mahinda Rajapaksa. He later resigned after weeks of anti-government protests that eventually turned violent.
The situation has been deteriorating for a long time. In 2019, more than 260 people were killed in Easter suicide bombings at churches and hotels. That catastrophic tourism, the main source of foreign exchange.
The government needed to increase its revenue as foreign debt increased for major infrastructure projects, but instead the Rajapaksa pushed through the largest tax cut in Sri Lanka’s history, which was recently reversed.
Creditors downgraded Sri Lanka’s rating, blocking it from borrowing more money as its foreign reserves sank. Then tourism flattened out again during the epidemic.
In April 2021, Rajapaksa abruptly banned the import of chemical fertilizers. The pressure on organic farming has taken farmers by surprise and destroyed the main rice crop, pushing up prices. To protect foreign exchange, imports of other luxury items were also banned. Meanwhile, the war in Ukraine has pushed up food and oil prices. Inflation was close to 40% in May and food prices rose by about 60%.
Why did the Prime Minister say the economy collapsed?
Such a clear declaration could undermine any confidence in the state of the economy and does not reflect any particular new growth. Wickremesinghe appears to be emphasizing the challenge his government faces in turning things around as he seeks help from the IMF and faces criticism over its lack of reform since taking office weeks ago. It is also blocking criticism from within the country. The purpose of his comments may be to try to buy more time and support as he seeks to get the economy back on track.
The finance ministry says Sri Lanka has only શકાય 25 million in usable foreign reserves. This leaves it without the equipment to pay for imports, let alone pay billions in debt.
Meanwhile, the Sri Lankan rupee has depreciated by about 80% to about 60 360 to $ 1. This makes import costs more restrictive. Sri Lanka has deferred about $ 7 billion in foreign loan repayments this year out of $ 25 billion to be repaid by 2026.
What is the government doing about it?
Wickremesinghe has enough experience. This is his sixth term as prime minister.
So far, Sri Lanka has been messing around, mainly supported by neighboring country India through 4 billion in credit lines. An Indian delegation was in the capital, Colombo, on Thursday for talks on further assistance, but Wickremesinghe warned against expecting India to keep Sri Lanka afloat for too long.
“Sri Lanka has one last hope at the IMF,” the Colombo Times headlined on Thursday. The government is in talks with the IMF on a bailout plan. Wickremesinghe said on Wednesday that he expects a preliminary agreement with the IMF by the end of July.
The government is also seeking more help from China. Other governments, such as the U.S., Japan, and Australia, have provided hundreds of millions of dollars in additional aid.
Earlier this month, the United Nations launched a worldwide public appeal for help. So far, the estimated funding has barely eroded the જરૂરી 6 billion needed to keep the country afloat in 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 more sharply discounted oil from Russia to help the country emerge from its crisis.

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