In June, Prime Minister Ranil Wickremesinghe — who now says he is willing to resign as protesters breached both his and the president’s residences over the country’s economic crisis — said Sri Lanka’s economy “completely collapsed.”
Sri Lanka is in the midst of its worst financial crisis in seven decades, after its foreign exchange reserves plummeted to record lows, with dollars running out to pay for essential imports including food, medicine and fuel.
The government recently took drastic measures to cope with the crisis, including implementing a four-day work week for public sector workers to allow them time to grow their own crops. However, the measures are doing little to ease the struggles faced by many in the country.
In several major cities, including the commercial capital, Colombo, hundreds continue to line up for hours to buy fuel, sometimes clashing with police and the military as they wait. Trains have reduced in frequency, forcing travelers to squeeze into compartments and even sit precariously on top of them as they commute to work.
Patients are unable to travel to hospitals due to the fuel shortage and food prices are soaring. Rice, a staple in the South Asian nation, has disappeared from shelves in many shops and supermarkets.
Wickremesinghe, who took office days after violent protests forced his predecessor Mahinda Rajapaksa to resign, appeared to place the blame for the country’s situation on the previous government in comments in June.
“It is no easy task to revive a country with a completely collapsed economy, especially one that is dangerously low on foreign reserves,” he said. “If steps had at least been taken to slow down the collapse of the economy at the beginning, we would not be facing this difficult situation today.”
Sri Lanka has mainly been relying on neighboring India to remain afloat – it has received $4 billion in credit lines – but Wickremesinghe said that too might not be enough.
The next step, he said, was to strike a deal with the International Monetary Fund (IMF).
“This is our only option. We must take this path. Our aim is to hold discussions with the IMF and arrive at an agreement to obtain an additional credit facility,” Wickremesinghe said.
Some context: For the past decade, according to Murtaza Jafferjee, chair of Colombo-based think tank Advocata Institute, the Sri Lankan government had borrowed vast sums of money from foreign lenders and expanded public services. As the government’s borrowings grew, the economy took hits from major monsoons that hurt agricultural output in 2016 and 2017, followed by a constitutional crisis in 2018, and the deadly Easter bombings in 2019.
30% is misfortune. 70% is mismanagement,” he said.
In 2019, the newly elected President Gotabaya Rajapaksa slashed taxes in an attempt to stimulate the economy.
“They misdiagnosed the problem and felt that they had to give a fiscal stimulus through tax cuts,” Jafferjee said.
In 2020, the pandemic hit, bringing Sri Lanka’s tourist-dependent economy shuddering to a halt as the country shut its borders and imposed lockdowns and curfews. The government was left with a large deficit.
Shanta Devarajan, an international development professor at Georgetown University and former World Bank chief economist, says the tax cuts and economic malaise hit government revenue, prompting rating agencies to downgrade Sri Lanka’s credit rating to near default levels – meaning the country lost access to overseas markets.
Sri Lanka fell back on its foreign exchange reserves to pay off government debt, shrinking its reserves from $6.9 billion in 2018 to $2.2 billion this year, according to an IMF briefing.
The cash crunch impacted imports of fuel and other essentials and, in February, Sri Lanka imposed rolling power cuts to deal with the fuel crisis that had sent prices soaring, even before the global crunch that ensued as Russia launched an unprovoked invasion of Ukraine.
In May, the government floated the Sri Lankan rupee, effectively devaluing it by causing the currency to plunge against the US dollar.
Jafferjee described the government’s moves as a “series of blunder after blunder.”
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CNN’s Rukshana Rizwie and Julia Hollingsworth contributed reporting to this post.