Explained the economic crisis in Sri Lanka

The reason for the dissatisfaction is the worst economic downturn since South Asia gained independence in 1948, when inflation led to the danger of rising commodity prices.

Here’s what you need to know.

Experts say the crisis has been preparing for years, caused by a small setback and a lot of mismanagement by the government.

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

The borrowing coincided with a series of hammer blows to Sri Lanka’s economy, from natural disasters – such as severe monsoons – to man-made disasters, including a government ban on chemical fertilizers that destroyed farmers’ crops.

These problems intensified in 2018, when the dismissal of the Prime Minister by the President caused a constitutional crisis; the following year, when hundreds of people in churches and luxury hotels died in the 2019 Easter bombings; and from 2020 with the advent of the Covid-19 pandemic.

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

But the move backfired, hitting government revenue instead. This has forced rating agencies to downgrade Sri Lanka to a level close to default, meaning the country has lost access to foreign markets.

Sri Lanka then had to use its foreign exchange reserves to repay public debt, reducing its reserves from $ 6.9 billion in 2018 to $ 2.2 billion this year. This affected imports of fuel and other necessities, leading to rising prices.

In addition, the government placed the Sri Lankan rupee in March, meaning that its value was determined on the basis of supply and demand in the foreign exchange markets.

The move was aimed at devaluing the currency to qualify for a loan from the International Monetary Fund (IMF) and stimulate remittances.

However, the depreciation of the rupee against the US dollar has only exacerbated 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 queues for basic goods, many of which are normalizing.

In recent weeks, stores have been forced to close because they do not have refrigerators, air conditioners and fans. Soldiers are stationed at gas stations to reassure customers who spend hours lining up in the heat to fill their sides. Some people even died waiting.

Sri Lanka is sending troops to gas stations amid the escalation of the economic crisis

One mother in the capital, Colombo, told CNN she was waiting for a gas offer to cook for her family. Others say the cost of bread has more than doubled, while rickshaws and taxi drivers say fuel rations are too meager to make a living.

Some find themselves in an impossible situation – they are forced to work to feed their families, but also have to stand in line for supplies. One cleaning lady with two young sons told CNN she was quietly leaving work to stand in line for food before hurrying back.

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

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

What is happening with the protests?

Protesters in Colombo took to the streets in late March, demanding government action and responsibility. Public frustration and anger erupted on March 31 when protesters threw bricks and set fire to the president’s private residence.

The police applied tear gas and water cannons to disperse the protests, and later imposed a curfew by 36 hours. President Rajapaksa declared a nationwide state of emergency on April 1, giving authorities the power to detain people without a warrant, and blocked social media platforms.

But the next day, protests continued against curfew, forcing police to arrest hundreds of protesters.

The protests continued in the following days, although they remained largely peaceful. On Tuesday night, crowds of student protesters again surrounded Rajapaksa’s residence, calling for his resignation.

The state of emergency was revoked on April 5.

Demonstrator near the president's private residence in Colombo, Sri Lanka, March 31.

What is happening with the Cabinet?

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

About 26 cabinet ministers resigned that weekend, including the president’s nephew, who criticized the apparent shutdown of social media as something he “never tolerates.” Other major figures, including the head of the central bank, have also resigned.

Faced with the administration in chaos, the president on Monday tried to carry out a reshuffle that he hoped would calm the opposition. Four ministers, including the finance minister, have been appointed to temporarily run the government, and several others have been given new positions in a bid 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 resigned, explaining that he had taken the position only because of “numerous requests” and that he later realized that “fresh and active and unconventional steps need to be taken”.

And the reshuffle failed to stop further desertions. The ruling coalition of the Popular Front of Sri Lanka (also known as Sri Lanka Podujana Peramuna) lost 41 seats by Tuesday after members of several partner parties came out to continue working as independent groups. The coalition was left with only 104 seats, losing a majority in parliament.

What did the government say?

President Rajapaksa made a statement on Monday, but did not directly address the issue of resignation, only calling on all parties to “work together for all citizens and future generations.”

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

Later that day, announcing the reshuffle in the cabinet, the president’s office issued a statement saying Rajapaksa “sought the support of all people to overcome the economic challenge facing the country.”

Earlier, Rajapaksa said he was trying to solve the problem, saying in an address to the nation last month that “this crisis was not created by me.”

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

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

What’s next?

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

Speaking last month, President Rajapaksa said he weighed the pros and cons of working with the IMF and decided to get help from a Washington agency, which his government was reluctant to do.

Sri Lanka has also asked for help from China and India, in March New Delhi has already issued a $ 1 billion credit line, but some analysts warn that the aid could simply prolong the crisis rather than resolve it.

What will happen next remains a lot of uncertainty; National consumer price inflation has almost tripled from 6.2% in September to 17.5% in February, according to the country’s central bank. And Sri Lanka is due to repay about $ 4 billion in debt for the rest of this year, including $ 1 billion in international sovereign bonds due in July.

Julia Hollingsworth of CNN, Rukshana Rizvi and Iqbal Atas made the report.

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