Why Sri Lanka is in an economic crisis?

The South Asian nation of Sri Lanka has been facing one of its worst-ever economic crises. It's confronting severe undersupply of essentials such as fuel, food, and medicines, forcing the people to queue up for the limited stocks.

Massive protest in Colombo Sri Lanka, demanding President Gotabaya Rajapaksa step down.

What has happened that this is the situation in Sri Lanka today?

The tourism industry, one of the essential sources of foreign exchange for the country, which represents over 10% of the country’s Gross Domestic Product and brings in foreign exchange, was poorly hit due to the Covid-19 pandemic. Besides, remittances from Sri Lankans working overseas also plunged sharply. 

 

As an outcome, forex reserves have decreased from over $7.5 billion in 2019 to around $2.8 billion in July this year.

President Rajapaksa has been slammed for the big tax cuts he introduced in 2019. Finance Minister Ali Sabry has said these lost the government income of more than $1.4bn (£1.13bn) a year.

When Sri Lanka's foreign currency shortages became a serious concern in early 2021, a decision to ban the import of chemical fertilizers, devastated the agriculture sector. This led to widespread crop failure. Sri Lanka had to supplement its food stocks from abroad, which made its foreign currency shortage even worse.

 

Shortages of food and fuel have caused prices to soar. Inflation is now running at 30%. There have been power cuts, and the scarcity of medicines has brought the health system to the verge of collapse. Protests have spread across the island in recent months.

The Government of Sri Lanka has racked up huge debts with countries including China, to fund what critics have called unnecessary infrastructure projects.

The Ukraine war has also increased food and oil prices globally, making imports more unaffordable. The central bank said inflation was at 30% in April, with food prices up nearly 50%.

Massive protest in Colombo Sri Lanka, demanding President Gotabaya Rajapaksa step down.

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