The Sri Lankan economic crisis is an ongoing crisis in the island-state of Sri Lanka. It started in 2019 and it is the country’s worst economic crisis, since its independence in 1948.
It has led to unprecedented levels of inflation, near-depletion of foreign exchange reserves, shortages of medical supplies and an increase in prices of basic commodities.
The crisis begun due to multiple compounding factors like money creation. A nationwide policy to shift to organic or biological farming.
Easter Bombings in Sri Lanka – 2019
The Easter bombings in 2019, and the impact of the COVID-19 pandemic. The subsequent economic hardships resulted in the 2022 Sri Lankan protests.
Sri Lanka was earmarked for sovereign default, as the remaining foreign exchange reserves of US$1.9 billion as of March 2022 were minimal.
They would not be sufficient to pay the country’s foreign debt obligations for 2022, with US$4 billion to be repaid.
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International Sovereign Bond
An International Sovereign Bond repayment of US$1 billion is due for repayment by the government in July 2022.
Bloomberg reported that Sri Lanka had a total of US$8.6 billion in repayments due in 2022. Including both local debt and foreign debt.
In April 2022, the Sri Lankan government announced that it was defaulting. Making it the first sovereign default in Sri Lankan history since its independence in 1948.
Sovereign Default
And the first state in the Asia-Pacific region to enter sovereign default in the 21st century. In June 2022, Prime Minister Ranil Wickremesinghe said in parliament, that the economy had collapsed, leaving it unable to pay for essentials.
According to W. A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, the country was a long way into an economic crisis in 2015.
The government which came into power in 2015 knew this. And had been warned by the Institute of Policy Studies of Sri Lanka about a number of risks.
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Prime Minister Ranil Wickremesinghe
In 2015, the then Prime Minister Ranil Wickremesinghe presented a strong economic policy to address the situation.
The coalition government could not get the policy pushed through Parliament. Which would eventually result in further policy confusion in the coming months.
The government did not adequately address the economic warnings. And emerging dangers, consuming itself in other government related activities such as “constitutional reforms”.
Ministry of Finance led by Ravi Karunanayake
Certain practices, including those used by the Ministry of Finance led by Ravi Karunanayake, were globally frowned upon.
Election related economic decisions were pushed. Such as excessive distribution of freebies. The Institute of Policy Studies of Sri Lanka’s 2014 State of the Economy Report highlighted.
Hot money, worrying borrowing practices, temporary and superficial quick-fixes. And monopoly of Foreign direct investment flow, into the hospitality sector.
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Political Turmoil in 2018
Further political turmoil in 2018 worsened the economic outlook. By that time the government had carried out several reforms.
Under an IMF supported program towards fiscal monetary consolidation and had successfully controlled inflation.
These reforms included an automatic fuel pricing formula. Which significantly reduced fiscal risks posed by state-owned enterprises (SOEs).
Value Added Tax Rate
Raised the Value Added Tax (VAT) rate from 11 percent to 15 percent and broadened the VAT base by removing exemptions.
Many of the reforms were reversed by the new government after the 2019 elections. The last administration also drafted the 2019 Central Bank Bill.
To make the Central Bank independent from political influence by banning the Treasury Secretary and any member of the Government.
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Members of the Monetary Board
From becoming members of the Monetary Board. Money printing was also to be banned, as the bill states “The Central Bank shall not purchase securities issued by the government.
Or any government-owned entity and any other public entity in the primary market.” Then Central Bank Governor, Dr. Indrajit Coomaraswamy, noted.
Balance of Payments issues, increased inflation, and asset bubbles as reasons for the ban. The Sri Lanka Podujana Peramuna Party opposed an independent Central Bank. And discarded the bill as soon as they came to power.
Lebanon’s Economic Situation
Many experts compared Lebanon’s economic situation with that of Sri Lanka. And had warned that Sri Lanka too was on the way to defaulting on its sovereign bonds.
Both nations had similar issues, including deep economic crises occurring after their successive governments, piled up unsustainable debts following the end of civil wars.
In March 2022, spontaneous and organized protests by both political parties and non-partisan groups, over the government’s mishandling of the economy were reported from several areas.
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Political Opposition
Several protests were staged by the political opposition demanding the current administration to solve the financial crisis and to immediately resign in wake of the wider economic crisis.
Tens of thousands of supporters of the opposition party, the United People’s Force led by Sajith Premadasa carried out protests on 16 March.
In front of the President’s office demanding that the president quit. On 30 March, Namal Rajapaksa arrived for the opening ceremony of a sports ground in Bandarawela.
Energy protests
Angry locals blocked the road demanding fuel which resulted in Namal Rajapaksa avoiding the area and the grounds being opened by the mayor instead.
On 31 March, a large group gathered around the residence of Gotabaya Rajapaksa. In Mirihana to protest against the power cuts that had reached over 12-hours a day.
The protest was initially spontaneous peaceful protest by citizens, until the police attacked the protestors with tear gas. And water cannons and the protestors burned a bus carrying riot control troops.
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Curfew in Colombo
The government declared a curfew in Colombo. Simultaneous protests were also reported on the Kandy-Colombo Road which was blocked by the protesters.
The government accused the protesters of being members of an extremist group and began to arrest them.
Candle light protests were also continuing in several areas while car horn tooting protests were also reported.
May 2022
In May 2022 the Rajapaksa family home was set on fire by protestors. Amidst the protests Mahinda Rajapaksa resigned as Prime Minister in May 2022.
But Gotabaya Rajapaksa refused to resign from the position of President and the protests continued.[204]
On 9 July protesters breached President’s Official House and set fire on the Prime Minister Wickremesinghe’s private residence in Colombo.
