Sri Lanka’s economic crisis, explained




CNN

Sri Lanka, an island nation of 22 million, is facing an economic and political crisis, with protesters taking to the streets in defiance of curfews and government ministers resigning en masse.

Discontent is being fueled by the worst economic downturn since the South Asian country gained independence in 1948, with crippling inflation driving up the cost of basic commodities.

Anger, which had been simmering for weeks, boiled over last Thursday, turning the protests violent – and throwing the government into disarray.

Here’s what you need to know.

Experts say the crisis dragged on for years, driven by a bit of bad luck and a lot of government mismanagement.

Over the past decade, the Sri Lankan government has borrowed huge sums of money from foreign lenders to fund public services, said Murtaza Jafferjee, president of the Colombo-based think tank Advocata Institute.

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

These problems were compounded in 2018, when the president’s dismissal of the prime minister sparked a constitutional crisis; the following year, when hundreds of people in churches and luxury hotels were killed in the 2019 Easter bombings; and from 2020 with the arrival of the Covid-19 pandemic.

Faced with a massive deficit, President Gotabaya Rajapaksa cut taxes in a failed attempt to stimulate the economy.

But this decision backfired, affecting public revenue instead. This prompted rating agencies to downgrade Sri Lanka to near-default levels, meaning the country lost access to overseas markets.

Sri Lanka then had to fall back on its foreign exchange reserves to pay down public debt, reducing its reserves from $6.9 billion in 2018 to $2.2 billion this year. This has impacted imports of fuel and other essentials, driving up prices.

To top it all off, the government launched the Sri Lankan rupee in March, meaning its price was determined by demand and supply in the foreign exchange markets.

The move appeared to be aimed at devaluing the currency to qualify for an International Monetary Fund (IMF) loan and encourage remittances.

However, the fall of the rupee against the US dollar has only made matters worse for ordinary Sri Lankans.

For Sri Lankans, the crisis has turned their daily lives into an endless cycle of queuing for basic goods, many of which are rationed.

In recent weeks, stores have been forced to close because they could not operate refrigerators, air conditioners or fans. Soldiers are stationed at petrol stations to calm customers, who have been queuing for hours in the scorching heat to fill up their tanks. Some people even died while waiting.

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

Some are caught in an impossible situation: they have to work to feed their families, but also have to queue for supplies. A street sweeper with two young sons told CNN she was quietly walking away from work to join queues for food, before hurrying home.

Even members of the middle class with savings are frustrated, fearing they will run out of essentials like medicine or gasoline. And life is made more difficult by frequent power cuts that plunge Colombo into darkness, sometimes for more than 10 hours at a time.

Protesters in Colombo took to the streets at the end of the march, demanding government action and accountability. Public frustration and anger erupted on March 31, when protesters threw bricks and set fires outside the president’s private residence.

Police used tear gas and water cannons to disperse protests and later imposed a 36-hour curfew. President Rajapaksa declared a nationwide public emergency on April 1, giving authorities the power to detain people without warrants, and blocked social media platforms.

But the protests took place the following day in defiance of the curfew, prompting police to arrest hundreds of protesters.

Protests continued in the days that followed, although they remained largely peaceful. On Tuesday evening, crowds of student protesters again surrounded Rajapaksa’s residence, calling for his resignation.

The emergency order was repealed on April 5.

A protester outside the president's private residence in Colombo, Sri Lanka, on March 31.

The entire cabinet of government was effectively dissolved on April 3 due to the mass resignations of key ministers.

Some 26 cabinet ministers resigned over the weekend, including the president’s nephew, who criticized the apparent social media blackout as something he “would never tolerate”. Other important personalities including the governor of the central bank have also resigned.

Faced with a chaotic administration, the president attempted a reshuffle on Monday that he hoped would appease the opposition. Four ministers, including a finance minister, have been appointed to temporarily lead the government, while several others have been given new posts in a bid to keep the country running ‘until a full cabinet is appointed. “, according to a presidential press release.

But just a day later, the temporary finance minister resigned – explaining that he had only taken the job because of “multitudes of requests”, and that he had subsequently realized that “ new proactive and unconventional measures had to be taken”.

And the reshuffle failed to stop further desertions. The ruling Sri Lanka People’s Front Coalition (also known as Sri Lanka Podujana Peramuna) lost 41 seats on Tuesday after members of several partner parties pulled out to continue as independent groups. The coalition ended up with only 104 seats, losing its majority in parliament.

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

“The current crisis is the result of several economic factors and global developments,” the statement said. “As one of the leading democratic countries in Asia, solutions must be found within a democratic framework.”

Later in the day, when the cabinet reshuffle was announced, the president’s office issued a statement saying that Rajapaksa was “seeking the support of all the people to overcome the economic challenge facing the country”.

Previously, Rajapaksa had said he was trying to solve the problem, saying in an address 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 a former president himself – told CNN it was wrong to say the government had mismanaged the economy. Instead, Covid-19 was one of the causes, he said.

Sri Lankan President Gotabaya Rajapaksa (centre) addresses the nation in Colombo on February 4.

Sri Lanka is now seeking financial support from the IMF and is looking to regional powers that might be able to help.

In his speech last month, President Rajapaksa said he weighed the pros and cons of working with the IMF and decided to seek a bailout from the Washington-based institution, which his government had hesitated to do.

Sri Lanka has also asked for help from China and India, with New Delhi already issuing a $1 billion line of credit in March – but some analysts have warned the aid could simply prolong the crisis rather than solve it.

There’s still a lot of uncertainty around what’s next; National consumer price inflation nearly tripled from 6.2% in September to 17.5% in February, according to the country’s central bank. And Sri Lanka has to pay off about $4 billion in debt over the rest of the year, including a $1 billion international sovereign bond that matures in July.


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