The Sri Lankan Economic Crisis Explained

“Streets are dark. People are out on streets either protesting or waiting in long queues. No water, no electricity, no fuel. Food is running short and fear lingers on every face.” This is today’s Sri Lanka. 

Mythology states that this land was home to treasure one can’t count. Legend says that the country was so rich that one of its rulers – Ravana – had his entire kingdom made of gold, literally. Fast forward to today, Sri Lanka is fighting for basic utilities like water, oil, electricity. How did Sri Lanka get here? Who or what triggered the economic decline of a country so historic? Why are Lankans on the street today enduring hardship and long queues? And above all, where does China stand in all these?

Let’s discover some answers.

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The state of Sri Lanka 

Sri Lanka is a South Asian country that lies in the Indian Ocean. It shares a maritime border with India and Maldives. It’s basically a multinational country with Sinhalese forming the nation’s majority population and Tamils as a minority. However, today the country is more recognized by its worsening economic infrastructure than geographic. The country is seemingly facing the worst economic crisis in 73 years and its impact may surprise you. 

Imagine a situation where a country’s government has to go to the length of switching off street lights in an attempt to conserve electricity. Plus, there is a shortage of food, fuel, medicine and every consumable item, so much so that the government has ordered the military to post soldiers to curb any tensions that might occur during distribution. 

Since March 2022, the government has imposed several restrictions that have altered the daily lives of the Lankans. What added to the financial woes of the island nation was the switch to organic farming, COVID-19 pandemic, Russia-Ukraine conflict, and its longstanding economic mismanagement. 

What led to Sri Lanka’s downfall?

Majorly, it can be attributed to 7 reasons. Let’s start with the top and move in that order.

History of incapable governance – The top reason behind Sri Lanka’s current setback is its governance. For a long time, the country has never seen a capable leader. The country was warned by the Institute of Policy Studies of Sri Lanka of its economic risks in 2015. By this time, the country was already a long way in its crisis, but it was still containable. However, the government which came to power in 2015 turned a blind eye to the crisis and instead consumed itself in unrelated activities, while undertaking some temporary and superficial quick fixes to reform the economy.

The Rajapaksa’s – Gotabaya Rajapaksa, current Sri Lankan president, along with his 8 other relatives of the Rajapaksa clan, manages 75% of the budget of the entire country. The Rajapaksas control almost every major ministry of the country. So basically, there’s just one family that has controlled an entire nation headed by Gotabaya ever since he took office. Asked if he or his family was to be blamed for the crisis, the president said, “it is the pandemic that needs to be blamed.”

Irrational tax decisions – The Rajapaksa government made large tax cuts. VAT was reduced to 8%, and several other taxes like PAYE were completely abolished. To cover the government’s income, its Central Bank printed money in record amounts, despite the warning of the IMF.

Long standing external debts – Sri Lanka has an obligation to pay $7 billion and an ISB overdue payment of $1 billion in 2022. The nation’s problem of repaying its longstanding debts is another reason that shines light on the fact that its finances has a history of poor management.

Association with China – Even though Sri Lanka and India share friendly ties owing to its common history and thousands of years of association, the country was lately influenced very much by the Asian superpower, China. China started creating ties with Sri Lanka to gain an infrastructure foothold, and in return, offered financial help. But it took no time for China to sever its ties with the nation and showing a blind eye at a time when it was supposed to help.

Fall of Tourism – A sector that contributed 10% of the total GDP, tourism was hit by two major events. First, the 2018 terrorist attack, and second, COVID-19 pandemic. Both created major challenges for the tourism sector that could never rebuild itself or contribute in any way in uplifting Sri Lanka’s economy for the past 3 years.

Switch to “Organic Farming” – A decision to elevate the overall health and wellness of the nation was the biggest debacle. In 2021, the Gottabaya government announced that it will ban all inorganic fertilizers and switch to organic farming. The decision may sound healthy, but its impacts were not. Eventually, organic farming led to a 20% drop in rice production and a 50% reduction in tea yields. Overall, a loss of $425 million was recorded in the first six months of adopting organic farming.

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