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Sri Lanka’s worst economic crisis has triggered an unprecedented wave of spontaneous protests as the island nation of 22 million people struggles with prolonged power cuts and a shortage of essentials, including fuel and medicines.
President Gotabaya Rajapaksa’s government has come under growing pressure for its mishandling of the economy, and the country has suspended foreign debt payments in an effort to preserve its paltry foreign exchange reserves.
On Monday, Sri Lanka will begin talks with the International Monetary Fund (IMF) for a loan programme, even as it seeks help from other countries, including neighbouring India, and China.
HOW DID IT GET TO THIS?
Economic mismanagement by successive governments weakened Sri Lanka’s public finances, leaving its national expenditure in excess of its income, and the production of tradable goods and services at an inadequate level.
The situation was exacerbated by deep tax cuts enacted by the Rajapaksa government soon after it took office in 2019, which came just months before the COVID-19 crisis.
The pandemic wiped out parts of its economy – mainly the lucrative tourism industry – while an inflexible foreign exchange rate sapped remittances from its foreign workers.
Rating agencies, concerned about government finances and its inability to repay large foreign debt, downgraded Sri Lanka’s credit ratings from 2020 onwards, eventually locking the country out of international financial markets.
But to keep its economy afloat, the government still leaned heavily on its foreign exchange reserves, eroding them by more than 70% in two years.
By March, Sri Lanka’s reserves stood at only $1.93 billion, insufficient to even cover a month of imports, and leading to spiralling shortages of everything from diesel to some food items.
J.P. Morgan analysts estimate the country’s gross debt servicing would amount to $7 billion this year, with the current account deficit coming in around $3 billion.
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