Before we analyze what’s going on in Sri Lanka, it’s important to know how did Sri Lanka even get here.
One of the most serious problems lies in the economic mismanagement by successive governments that created and sustained a twin deficit in Sri Lanka. With a classic twin deficit economy, the country’s expenditure necessarily exceeds the national income, something that’s not even repairable by extra tax cuts or an increased production as well.
Worst of all, the lucrative tourism industry and foreign workers’ remittances sapped by the pandemic still didn’t go back to normal, even after the pandemic. This significantly increased costs, tax deductions, lower national wages, and an overall increase in debt for the country.
Even the debt management program by Sri Lanka derailed and the foreign exchange reserves plummeted by almost 70 percent in the last two years. The Rajapaksa government’s decision to ban all chemical fertilizers in 2021, a move that was later reversed, also hit the country’s farm sector and triggered a drop in the critical rice crop.
And not surprisingly enough, the government of Sri Lanka has failed to pay more than $80 million in debt interest payments, making the economy of the country a default one. This severely impacted the confidence of the investors in the country, making it really hard for the government to borrow loans. Sri Lanka now owes $50bn (£40bn) to foreign creditors but says it cannot pay them. It is asking for a loan from the International Monetary Fund (IMF).
For the people, the impact is reflected the most. With a food shortage, increased fuel prices, and increasing costs, the inflation of the country is running at 30% right now, being at an all-time high. To make matters worse, power cuts, lack of resources, food, medical equipment, and other services have made people come out on the streets and detest the current situation.
Right now, the government seems to be seeking help from China and India, starting with fuel. Sri Lanka and India also have signed a $1 billion credit line for importing essentials, including food and medicine, and the Rajapaksa government has sought at least another $1 billion from New Delhi.
We’re only hoping that things go back to normal as soon as possible. Till then, fingers crossed!
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