Sri Lanka’s economic crisis, explanation

The reason for the discontent is the worst recession since the South Asian nation gained independence in 1948, when crushing inflation caused the cost of basic commodities to skyrocket.

Here’s what you need to know.

Experts say the crisis has been in the making for years, aided by a bit of bad luck and mismanagement on the part of the government.

Over the past decade, the Sri Lankan government has borrowed huge amounts of money from foreign lenders to finance public services, said Murtaza Jafferjee, chairman of the Colombo-based think tank Advocata Institute.

This boom in borrowing coincided with a series of hammer blows on Sri Lanka’s economy, from natural disasters like strong monsoons to man-made disasters, including a government ban on chemical fertilizers that wiped out farmers’ crops.

These problems were exacerbated in 2018 when the dismissal of the prime minister by the president triggered a constitutional crisis; the following year, when hundreds of people in churches and luxury hotels were killed in the Easter 2019 bombings; and since 2020 with the advent of the Covid-19 pandemic.

Faced with a massive deficit, President Gotabaya Rajapaksa cut taxes in a doomed attempt to stimulate the economy.

But the move backfired, hitting government revenue instead. This prompted rating agencies to downgrade Sri Lanka to near default, meaning the country lost access to foreign markets.

Sri Lanka then had to use its foreign exchange reserves to pay off its public debt, reducing its reserves from $6.9 billion in 2018 to $2.2 billion this year. This affected the import of fuel and other necessities, causing prices to skyrocket.

On top of that, in March, the government floated the Sri Lankan rupee, meaning it was priced based on supply and demand in the foreign exchange markets.

The move appears to have been aimed at devaluing the currency in order to qualify for a loan from the International Monetary Fund (IMF) and encourage remittances.

However, the depreciation of the rupee against the US dollar only worsened the situation of ordinary Sri Lankans.

What does this mean for people on earth?

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

Stores have been forced to close in recent weeks because refrigerators, air conditioners or fans don’t work. Soldiers are posted at gas stations to reassure customers who queue for hours in the sweltering heat to fill up their tanks. Some people even died waiting.

Sri Lanka sends troops to gas stations amid worsening economic crisis

One mother from the capital Colombo told CNN she is waiting for propane to cook for her family. Others say the cost of bread has more than doubled, while rickshaw and taxi drivers say fuel rations are too scarce to make a living.

Some of them are caught in a stalemate – they have to work to feed their families, but they also have to queue for supplies. One janitor with two young sons told CNN she sneaks out of work to queue for food before rushing back.

Even members of the middle class who have savings are frustrated, fearing they may run out of essentials such as medicine or gas. And life is made more difficult by frequent power outages that plunge Colombo into darkness, sometimes for more than 10 hours at a time.

Sri Lankans watch a burning bus during a protest outside the president's home in Colombo April 1.

What’s going on with the protests?

Protesters in Colombo took to the streets in late March demanding action and accountability from the government. Public frustration and anger flared on March 31 when demonstrators threw bricks and set fire to the president’s private residence.

Police used tear gas and water cannons to disperse the protests, after which they imposed a 36-hour curfew. President Rajapaksa declared a national emergency on April 1, giving authorities the power to detain people without a warrant, and blocked social media platforms.

But protests continued the next day despite a curfew, prompting police to arrest hundreds of demonstrators.

The protests have continued since then, although they have remained largely peaceful. On Tuesday night, crowds of protesting students once again surrounded Rajapaksa’s residence, calling for his resignation.

The emergency order was lifted on 5 April.

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

What’s going on with the Cabinet?

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

About 26 cabinet ministers resigned this weekend, including the president’s nephew, who criticized the apparent social media shutdown, calling it “never condoning.” Other major figures, including the central bank governor, also resigned.

Faced with chaos in the administration, on Monday the president attempted a reshuffle that he hoped would appease the opposition. Four ministers, including the finance minister, have been appointed to lead the government interim, while several others have been given new positions in an attempt to keep the country functioning “until a full cabinet is appointed,” the president said in a press release.

But just a day later, the interim finance minister left, explaining that he had only taken the position because of “a lot of requests” and that he subsequently realized that “fresh, proactive and unconventional steps needed to be taken.”

And the reshuffles failed to stop further desertions. Sri Lanka’s ruling Popular Front Coalition (also known as the Sri Lankan Podujana Peramuna) lost 41 seats by Tuesday after members of several partner parties withdrew to continue as independent groups. The coalition was left with 104 seats, losing its majority in parliament.

What did the government say?

President Rajapaksa issued a statement on Monday, but did not directly refer to the resignation, but only called on all parties to “work together for the benefit of all citizens and future generations.”

“The current crisis is the result of several economic factors and global events,” the statement said. “As one of the leading democracies in Asia, solutions must be found within the democratic framework.”

Later that day, while announcing the cabinet reshuffle, the Office of the President released a statement saying that Rajapaksa was “seeking the support of all people to overcome the economic problems the country was facing.”

Rajapaksa has previously said he is trying to solve the problem, saying in a state of the nation address last month that “this crisis was not created by me.”

On April 1, Prime Minister Mahinda Rajapaksa — the president’s older brother and a former president himself — told CNN that it would be wrong to say the government was mismanaging the economy. Instead, Covid-19 was one of the reasons, he said.

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

What’s next?

Now Sri Lanka is seeking financial support from the IMF and is turning to regional authorities who can help.

During a speech last month, President Rajapaksa said he had weighed the pros and cons of working with the IMF and decided to seek bailouts from the Washington institution, which his government was reluctant to do.

Sri Lanka has also turned to China and India for help, with New Delhi already providing a $1 billion credit line in March, but some analysts warn that the bailout could only prolong the crisis, not solve it.

There is still a lot of uncertainty about what will happen next; The country’s consumer price inflation nearly tripled, from 6.2% in September to 17.5% in February, according to the country’s central bank. And Sri Lanka has to repay about $4 billion of debt by the end of this year, including $1 billion in international sovereign bonds that mature in July.

Julia Hollingsworth of CNN, Rukshana Rizvi and Iqbal Atas contributed to the reporting.

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