We are all predominantly myopic. Now that the cost-of-living crisis is biting at our feet, we’ve forgotten about the COVID-19 pandemic and inquiries into how the UK government did. The racial agenda catalysed by the Black Lives Matter movement doesn’t come up in our feeds anymore. Even huge stories like the Iranian protests and the Taliban’s takeover of Afghanistan are practically non-existent in mainstream media. One such difficult story that captured headlines for a couple of days before gathering dust in the natural news cycle, and contained real human pain on a nationwide scale, is the Sri Lankan economic crisis.

A gradually grown catastrophe, through economic mismanagement under the Rajapaksa family’s bureaucratic government, has left the Sri Lankan people in dire straits and the economy has “completely collapsed”. [1] It is an extraordinary story of a lack of foresight and gross economic incompetence.

Inflation all across Sri Lanka is at unreal levels, more than 70% in August [2] and now declining to around 50%. Food, medicines and fuel are in short supply [3], exacerbated by the Russian invasion of Ukraine. According to the Colombo Consumer Price Index, September’s food inflation was at an egregious 94.9%, forcing millions of the 22mn citizens into starvation and poverty, which is projected to remain above 25% for the next few years. [4]

This skyrocketing cost of living has made maintaining a basic standard of living near impossible. There are long queues for fuel, insufficient for buses, trains and even medical vehicles. Power cuts and blackouts have become regular while children are suffering from malnutrition and an inability to attend school, affecting their future development. Sri Lanka is on its knees, stuck in the eye of a swirling painful humanitarian, economic and political crisis.

Most of the economic destruction can be put down to previous regimes, predominantly run by the Rajapaksa family, and their inept management of the economy.

After the 2009 civil war, their focus on producing domestically instead of foreign trade hurt their current account deficit (on the balance of payments). This contributed to a foreign currency shortage, explored later.

They consistently underinvested in infrastructure along with nationalising industry, reducing economic growth, projected to be -9.2% in 2022 - a dark recession.

The announcement of unfunded, ill-advised tax cuts in 2019 meant the state lost income of over $1.6bn, a large proportion for a middle-income nation with GDP of $81bn. It left them with one of the smallest tax-to-GDP ratios (8%) and a downgraded credit rating. This is coupled with an ineffective social protection program, Samurdhi. [5]

These structural and discretionary policy mistakes gave rise to a dearth of foreign currency and huge debts.

As previously discussed, the lack of exports hurt the foreign currency reserves, which have “plummeted an astounding 99 percent from 2019, when they stood at $7.6 billion, to only $50 million in July 2022.” [6] Importing $3bn more than exporting has cost them dearly.

Lots of foreign currency comes from tourism, which decreased due to bombing attacks in 2019 and the COVID pandemic, revenue dropping to $200mn in 2021 from $4.4bn 3 years before. [6] Remittances, the country’s largest foreign exchange earner (money is converted into Rupees), has also fallen from a high of $7bn in 2014 to $5.49bn in 2021

In response to the shortfalls in supplies on the forex, the government restricted imports of chemical fertilisers and instead instructed farmers to use local organic fertilisers.

However, these were of poor quality, leading to widespread crop failure and 2 damaging secondary impacts. They both had to import more food e.g. rice, making the crisis worse, and exported less food e.g. tea, causing an overall poorer trade balance. In all, the Sri Lankan Rupee tumbled, despite the Bank’s efforts to prop it up until March (see graph below).

Since then, there has been some return to economic stability by suspending foreign-debt repayments and decreased imports freeing up foreign exchange. This has been spent on fuel supplies, shortening queues and power cuts. [7]

The economy also suffers from severe debt levels, owing more than $51bn to foreign lenders (this was 119% of GDP in 2021), with $6.5bn to China. They ended up defaulting on their debt in April 2022 and declared bankruptcy in May.

This was a vicious cycle: unable to service their debt and make interest payments, their reputation and trust amongst investors were damaged, making it even more difficult to borrow money.

The government has been trying to restructure its debt repayment plans along with receiving support of $600mn from the World Bank, a minimum of $1.9bn from neighbours India, and a possible $3bn bailout package from the IMF and emergency support from the likes of the United States, Japan and Bangladesh. This assistance should buy time for further stopgaps like debt relief plans and aid packages [2], crucial debt cancellation and help towards economic recovery, expected to take until 2026

Sri Lanka: an economic tragedy on many fronts, driven by corrupt bureaucratic maladministration and poor economics, that has compounded ‘gradually, then suddenly’ as Hemingway might put it, into political instability, a power vacuum and bankruptcy, leaving the Sri Lankan people struggling. The world watched the social unrest of protests and even a January 6 style storming of ex-President Rajapaksa’s office. As Professor Mick Moore from the University of Sussex, previously a consultant for Sri Lanka at the Asian Development Bank put it, “this is the most man-made and voluntary economic crisis of which I know”; it is a hole dug too far and one which will take many years to get out of.

Bibliography:

https://www.weforum.org/agenda/2022/07/economic-politics-debt-protest-crisis-sri-lanka/ - contains an excellent visual

​​https://foreignpolicy.com/2022/10/06/sri-lanka-economic-crisis-protests-imf/

https://www.bbc.co.uk/news/world-asia-62132271

https://www.worldbank.org/en/country/srilanka/overview

https://www.hrw.org/news/2022/08/16/sri-lanka-economic-crisis-puts-rights-peril

https://www.gisreportsonline.com/r/sri-lanka-struggles-economically/

https://www.economist.com/asia/2022/11/17/sri-lankas-president-pushes-economic-stability-over-political-reform