Sri Lanka’s economic crisis, explained

The worst economic downturn since the independence of the South Asian country in 1948 has caused discontent, with stagnant inflation pushing up commodity prices.

Here is what you need to know.

Experts say the crisis, driven by a small misfortune and several mismanagement of the government, has been developing for years.

Over the past decade, the Sri Lankan government has borrowed large sums of money from foreign lenders to finance public services, said Murtaza Jaffarji, head of the Colombo-based think tank Advocata Institute.

The borrowing coincided with a series of hammer blows to the Sri Lankan economy, including natural disasters – such as heavy monsoon – man – made disasters and the government’s ban on chemical fertilizers that destroy farmers’ harvests.

In 2018, when the removal of the Prime Minister triggered a constitutional crisis, these problems escalated; The following year, when hundreds of people were killed in churches and luxury hotels in the 2019 Easter bombings; And with the advent of the Govt-19 epidemic from 2020 onwards.

Faced with a massive deficit, President Gotabhaya Rajapakse cut taxes in an effort to boost the economy.

But the move backfired, rather than affecting government revenue. This pushed the rating agencies to almost default on Sri Lanka, which means the country has lost access to foreign markets.

Sri Lanka had to withdraw its foreign exchange reserves to pay off government debt, which was reduced from $ 6.9 billion in 2018 to $ 2.2 billion this year. This affected imports of fuel and other essential commodities, which pushed up prices.

First of all, in March the government floated the Sri Lankan rupee — that is, its value was determined by the demand and supply of foreign exchange markets.

The move appeared to be aimed at devaluing the currency in order to encourage borrowing and remittances to the International Monetary Fund (IMF).

However, the depreciation of the rupee against the US dollar made the situation worse for ordinary Sri Lankans.

What does this mean for those on the ground?

For Sri Lankans, the crisis has turned their daily lives into an endless cycle of waiting in line for basic necessities, many of which are rationed.

In recent weeks, stores have been forced to close due to the inability to operate refrigerators, air conditioners or fans. Soldiers are stationed at gas stations to calm customers, who line up in the sun for hours to fill their tanks. Some have died waiting.

Sri Lanka is sending troops to petrol stations amid a severe economic crisis

A mother in the capital, Colombo, told CNN she was waiting for propane gas to cook for her family. Others say the price of bread has doubled, while auto rickshaws and taxi drivers say fuel rations are too low to sustain life.

Some are stuck in a situation where they can’t – they have to work to feed their families, but have to stand in line for supplies. A street cleaner with two young sons told CNN he was quietly slipping out of work to join the queue for food before returning in a hurry.

Even the middle class with savings are frustrated by the fear of running out of essentials like medicine or gas. And the frequent power outages that plunge Colombo into darkness sometimes make life difficult by living for more than 10 hours at a time.

Sri Lankans see a burning bus during a protest outside the president's house in Colombo on April 1.

What happens in struggles?

Protesters took to the streets in Colombo in late March to demand government action and accountability. On March 31, public frustration and anger erupted when protesters threw bricks and set fire outside the president’s private residence.

The police used tears and water cannons to dissolve the struggle, and then issued a 36-hour curfew order. President Rajapakse declared a nationwide public emergency on April 1, authorizing authorities to detain people without warrants, and blocking social media sites.

But the next day protests erupted in defiance of the curfew order, prompting police to arrest hundreds of protesters.

Over the course of the day the struggles continued peacefully. On Tuesday night, a crowd of student protesters again surrounded his home, demanding that Rajapaksa resign.

On April 5 the emergency law was repealed.

A protester outside the president's private residence in Colombo, Sri Lanka, on March 31.

What is going on in the cabinet?

The entire cabinet of the government was dissolved on April 3 due to the mass resignations of top ministers.

That weekend, 26 cabinet ministers resigned, including the president’s nephew, who criticized the social media freeze, saying he would “never forgive”. Other key figures, including the central bank governor, resigned.

Faced with chaotic administration, the president sought re-election on Monday, hoping he would appease the opposition. Four ministers, including a finance minister, have been temporarily appointed to run the government, and many more have been given new positions in an effort to keep the country afloat “until a full cabinet is appointed,” the president said in a statement.

But a day later, the caretaker finance minister resigned – explaining that he had taken over the post “because of many demands” and later realized that “new and effective and unusual measures need to be taken”.

The restructuring failed to stop further exits. The ruling Sri Lanka People’s Alliance (also known as the Sri Lanka People’s Alliance) lost 41 seats by Tuesday after members of several partner parties withdrew from continuing to be independent groups. The coalition, which lost a majority in parliament, won only 104 seats.

What did the government say?

President Rajapakse issued a statement on Monday, but did not address the resignations directly, urging all parties to “work together for the benefit of all citizens and future generations.”

“The current crisis is the result of a number of economic factors and global developments,” the statement said. “As one of Asia’s leading democracies, solutions must be found within the framework of democracy.”

On the same day, announcing the cabinet reshuffle, the President’s Office issued a statement saying, “Rajapaksa sought the support of all the people to tackle the economic challenge facing the country.”

Earlier, Rajapaksa had said in a speech to the nation last month that he was trying to resolve the issue, adding that “this crisis was not created by me”.

On April 1, Prime Minister Mahinda Rajapakse – the president’s older brother and former president – told CNN that the government had mismanaged the economy. Instead, Govt-19 is one of the reasons, he said.

Sri Lankan President Gotabhaya Rajapaksa (center) addresses the nation on February 4 in Colombo.

What’s next?

Sri Lanka is now seeking financial assistance from the International Monetary Fund and has returned to regional powers that can help.

During his speech last month, President Rajapakse said he had weighed the pros and cons of working with the IMF and had decided to seek bail from the Washington-based company.

Sri Lanka has sought help from China and India, with New Delhi already paying $ 1 billion in debt in March – but some analysts have warned that the aid crisis could not be resolved.

There is still uncertainty about what is to come next; According to the country’s central bank, national consumer price inflation nearly tripled to 6.7% in February from 6.2% in September. In addition, Sri Lanka will have to repay about $ 4 billion in debt this year, including $ 1 billion in international sovereign bonds maturing in July.

CNN’s Julia Hollingsworth, Rukshan Rizvi and Iqbal Adas contributed to the reporting.

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