Sri Lanka’s economy “completely collapsed,” according to Prime Minister Ranil Wickremesinghe, who now says he is ready to step down after protesters broke into both his and the president’s homes over the country’s financial crisis.
With its foreign exchange reserves at record lows and money running out to pay for basic imports like food, medicine, and fuel, Sri Lanka is experiencing its worst financial crisis in seven decades.
Recently, the government implemented drastic measures to address the crisis, including a four-day work week for public sector employees to give them time to cultivate their own crops. The struggles faced by many people in the nation are not being significantly alleviated by the measures, though.
Numerous large cities, including the commercial center of Colombo, continue to see long lines of people waiting to buy fuel, occasionally coming to blows with the police and the military in the process. Due to the decrease in train frequency, commuters are now required to cram into compartments and even perch precariously on top of them.
Due to the fuel shortage and rising food prices, patients cannot travel to hospitals. The South Asian nation’s staple food, rice, is no longer available on the shelves of many stores and supermarkets.
In remarks made in June, Wickremesinghe—who assumed office just days after violent protests forced his predecessor Mahinda Rajapaksa to step down—seemed to assign blame for the nation’s predicament to the previous administration.
It is difficult to rebuild an economy that has completely collapsed, especially when foreign reserves are dangerously low, he said. “We wouldn’t be in this difficult situation right now if steps had at least been taken to slow down the economy’s collapse at the beginning.”
Although Sri Lanka has received $4 billion in credit lines from its neighbor India to stay afloat, Wickremesinghe said that may not be enough.
He stated that the following step was to reach an agreement with the International Monetary Fund (IMF).
“This is the only choice we have. We must go down this road. Our goal is to have talks with the IMF and reach a deal to get another credit facility, according to Wickremesinghe.
Some background: According to Murtaza Jafferjee, head of the Colombo-based think tank Advocata Institute, the Sri Lankan government has expanded public services while borrowing sizable sums of money from foreign lenders over the past ten years. Large monsoons that reduced agricultural output in 2016 and 2017 along with a constitutional crisis in 2018 and the deadly Easter bombings in 2019 all hit the economy hard as the government’s borrowing increased.
30 percent is bad luck. “70% is poor management,” he claimed.
In an effort to boost the economy in 2019, the newly elected President Gotabaya Rajapaksa lowered taxes.
They made a mistake in their diagnosis and believed that tax cuts were the only way to provide a fiscal stimulus, according to Jafferjee.
The pandemic struck in 2020, halting Sri Lanka’s tourist-dependent economy as the nation closed its borders and instituted lockdowns and curfews. A sizable deficit was left for the government.
According to Shanta Devarajan, a Georgetown University professor of international development and a former chief economist of the World Bank, tax cuts and economic stagnation reduced government revenue, which led rating agencies to downgrade Sri Lanka’s credit rating to close to default levels, preventing the country from accessing international markets.
According to a briefing from the IMF, Sri Lanka used its foreign exchange reserves to pay off government debt, reducing them from $6.9 billion in 2018 to $2.2 billion this year.
The financial crisis had an impact on imports of fuel and other necessities, and in order to deal with the fuel crisis that had sent prices skyrocketing even before the global crisis that followed as Russia launched an unprovoked invasion of Ukraine, Sri Lanka implemented rolling power cuts in February.
The government floated the Sri Lankan rupee in May, which resulted in a sharp decline in the value of the currency when compared to the US dollar.
The actions of the government were characterized by Jafferjee as “series of blunder after blunder.”