Here’s why Sri Lanka’s economy is in crisis

How did Sri Lanka’s economy deteriorate?

It all mainly started in 2019, when a series of terror bombings took place across Sri Lankan hotels and Churches on Easter Sunday, killing more than 250 people.

Consequently, their tourism sector, which accounts for 5% of the Gross Domestic Product, witnessed a huge fall in the number of incoming tourists.

Not long after this, the tourism sector took another blow when COVID-19 began to spread. Moreover, the Russian invasion of Ukraine worsened this situation since both of these countries were a major source of tourism for Sri Lanka.

Another factor that is thought to have led to this distress is the tax cuts that the government announced in 2019. That year, the cabinet decided to cut the value-added-tax to 8%, down by 7% from the previous 15%.

They also eradicated multiple taxes, including a 2% nation-building tax which was paid by corporations. Not only this, all religious institutions were to be exempt from paying tax.

For now, the government has announced that it will be temporarily defaulting on all its foreign debt, which is a total of $51 billion.

And in terms of 2022 alone, they have a debt load of $7 billion with just $1.9 billion in their foreign exchange reserves as of March this year.

When questioned about this, the finance ministry stated the following: ‘The government is taking the emergency measure only as a last resort in order to prevent further deterioration of the republic’s financial position’.

How have citizens been impacted by this crisis?

Needless to say, the general Sri Lankan public has borne the brunt of this economic downfall.

In the early months of 2022, milk powder and cooking gas were the first to disappear from the shelves. This was followed by a fuel shortage, which disrupted transportation and caused several power blackouts.

As a matter of fact, fuel became so scarce that two men in their seventies died while waiting in long queues for petrol and kerosene oil.

Only this week, the authorities hiked the price of antibiotics, some painkillers, and medicines, by 40%. As a result, citizens have been forced to purchase medication that is below their prescribed limit or search for their medication abroad.

However, even those who can afford pharmaceuticals at increased prices face a shortage of supply. Currently, steroids, life-saving anti-biotics, and anti-biotics for paediatrics are available in an extremely limited quantity.

The government has defended their actions by claiming that they have no other option but to increase the price of these medicines in an effort to preserve their foreign exchange reserves.

Although, to resolve this issue, the Sri Lankan government claims to have approached the World Bank, and is expecting a sum of $600 million which should help bring down the prices of these drugs.

Moreover, neighbouring country India has also attempted to aid Sri Lanka in this crisis. In fact, on 29th April, the Indian High Commissioner to Sri Lanka handed over a consignment of life-saving drugs to the authorities.

What is Sri Lanka doing to restore its economy?

Last month, Finance minister Ali Sabry was in Washington to hold talks with the IMF; the Ministry of Finance had requested that the IMF issue a Rapid Financing Instrument (RFI), which is financial assistance meant specifically for emergency situations, without which said country would face ‘severe economic disruption’.

Central bank Chief Nanadalal Weerasinghe is hoping for about $3 billion from the IMF, but he says that this is not possible without carrying out certain financial reforms.

His primary concern is the tax system because their current taxation rates are unsustainable and need to be restored at the levels that they were at before the controversial 2019 reforms.

Apart from this, India has agreed to defer $1.5 billion in import payments that Sri Lanka owed the Asia Clearing Union. Additionally, India granted Sri Lanka a $500 million credit line in order to finance their fuel requirements.

Yet, despite these efforts, the general public may not be completely satisfied without a change in leadership.

This is because protestors hold President Gotabaya Rajapaksa and his family- who have had a stronghold on Sri Lankan governance for the last twenty years- responsible for the economic downfall.

In light of this, on 29th April, President Rajapaksa agreed to remove his brother Prime Minister Mahinda Rajapaksa from his position, and appoint a new council, comprising of all the parties in the parliament.

With several political parties willing to break party lines in order to unite and save their country, only time will tell whether the new cabinet will be able to restore the Sri Lankan economy.