What goes wrong in Sri Lanka?

Sri Lanka urged its citizens overseas to send home money to help pay for desperately needed food and fuel after announcing a default on its $51 billion foreign debt on April 12, 2022.

The island nation is in the grip of its worst economic crisis since independence in 1948, with severe shortages of essential goods and regular blackouts causing widespread hardship.

Central bank governor Nandalal Weerasinghe said he needed Sri Lankans abroad to “support the country at this crucial juncture by donating much needed foreign exchange”.

The default announcement will save Sri Lanka about $200 million in interest payments falling due on April 18, he said, adding that the money would be diverted to pay for essential imports.

Just under half of Sri Lanka’s debt is market borrowings through international sovereign bonds, including one worth $1 billion that was maturing on July 25. A coupon payment of $78 million is due across two of its bonds maturing in 2023 and 2028 on April 18, though there is a 30-day grace period.

Estimates showed Sri Lanka needed $7 billion to service its debt load this year, against just $1.9 billion in reserves at the end of March.

Sri Lanka, which gained its independence from Britain in 1948, only recently emerged from a deadly and costly 26-year civil war.

The war was fought between the government, military of this majority Sinhalese country and armed separatists from the Tamil-speaking minority. Civilians and civil properties were frequent targets.

Towards the end of the war, in 2006, the government tried to jumpstart growth by borrowing heavily and attracting foreign capital by propping up the rupee. In the short term, the strategy worked.

The economy boomed, causing the per-capita gross domestic product to surge from $1,436 in 2006 to $3,819 in 2014 — vaulting Sri Lanka past Ukraine, the Philippines and Indonesia. This lifted 1.6 million people out of poverty — 8.5 per cent of the population — and gave rise to a large middle class. By 2019, Sri Lanka ascended to the ranks of the World Bank’s “upper-middle-income” countries.

The designation lasted only for a year, however, because all that growth came at a cost. Sri Lanka’s external debt tripled from 2006 to 2012, pushing the total public debt to 119 per cent of GDP.

Those policies were suspended for a time in 2015, which stabilised the economy at a lower rate of growth, but the debt continued to accumulate.

Tourists, who spent $5.6 billion in 2018 and played a big role in balancing Sri Lanka’s $10 billion trade deficit, disappeared virtually overnight.

This dealt a massive blow to the economy, especially considering a large tax cut the previous year depleted government coffers. Simply paying interest on that large debt took up 72 per cent of government revenue in 2020, requiring the central bank to print more cash to avoid default, thus fuelling inflation.

Fortunately for the government and its citizens, Sri Lankans overseas continued to send home a vital lifeline of remittances, or about $7 billion a year.

According to the Assistant Professor of Economics at Indiana University–Purdue University Indianapolis, Vidhura S Tennekoon, “In 2021, as many economists and analysts urged Sri Lanka to seek international aid, the central bank instead focused on borrowing from its neighbours, maintaining the value of the rupee and restricting imports.

The export controls caused shortages of essential goods like cooking gas and milk, and defending the currency drained Sri Lanka’s foreign reserves. Moreover, remittances began to drop as the black market value of the rupee fell, leading people to avoid converting dollars to rupees at the official rate or by official channels. Annual inflation has been estimated at as much as 55 per cent, compared with the official rate of 14 per cent.”

By March 2022, reverberations from the war in Ukraine, which drove up international prices of oil, wheat and many other commodities, forced the government to change course. Beyond the effect on the cost of imported goods, the war also further threatens Sri Lanka’s tourism industry as flights to Moscow are now suspended. Before the war, Russians frequently made up the biggest share of Sri Lankan tourists, with Ukrainians not far behind.

Another blow to the country’s dwindling finances came after President Gotabaya Rajapaksa a 10-year transition to fully organic farming in Sri Lanka. What was supposed to be a slow and gradual transition turned into a sudden shock when in April 2021, he announced that starting next month, the import of chemical fertilisers and agrochemicals would be completely banned in the country.

The snowballing economic crisis began to be felt after the coronavirus pandemic torpedoed vital revenue from tourism and remittances. The government imposed a wide import ban to conserve dwindling foreign currency reserves and use them to service the debts it has now defaulted on.

The people of Sri Lanka have been suffering for months now, the price of everything has shopped through the roof there’s been talk of quote-unquote bankruptcy.

An unprecedented economic crisis has unfolded in Sri Lanka. And while the country’s problems have been brewing for years, spillovers from the crisis in Ukraine have sent the island nation over the edge.

The Sri Lankan rupee has plunged to a record low against the dollar. Annual inflation is in the double digits. Import controls are in effect. As a result, power blackouts are routine. Fuel, food and medicine — most of which are imported — are scarce, and rising prices are putting what remains out of reach for many Sri Lankans. Even printing paper is hard to come by, forcing schools to cancel exams. The problems have sparked the biggest protests seen here in years. Troops have been sent in to quell them.

It’s not just an economic crisis anymore it’s turning into a humanitarian crisis hospitals are putting up surgeries because they do not have power. Long power cuts an acute shortage of food long lines at petrol stations factories shutting down people dying on the streets and troops deployed in cities.

The country is facing an Economic Armageddon. People have taken to the streets against the government. The famous chants have been “if you can’t do it go home gota go home go to baya go back to America.” These are the slogans being chanted for the Rajapaksas who used to be Sri Lanka’s most popular leaders.

They are facing the worst protest since coming to power Sri Lankans want them out they’re angry and the reason is an economic meltdown. They are struggling to make ends meet and this crisis has been on for months now it’s going from bad to worse. In the last couple of weeks, at least four people have died waiting in queues. They wanted some petrol they died waiting for it. Now the army has been deployed at petrol stations the situation is really bad it has triggered an exodus of Sri Lankans.

Colombo is in such dire straits it is shutting down embassies to save costs as of now they’ve decided to shut two embassies in Iraq and Norway and one consul general’s office in Sydney, Australia. They have stopped operations since March 31, 2022, because their government does not have the budget to run them.

The government is controlled by one family; the Rajapaksas. The president is Rajapaksasa Gotabaya, the Prime Minister is the Rajapaksa Mahinda, the President’s older brother, the Finance Minister is the Rajapaksa too, Basil Rohana, the third brother the eldest of the Rajapaksa siblings is Chamal, he is the Minister of Irrigation then you have the prime minister’s son Namal Rajapaksa, Minister of Youth and sports. One family runs this country, how much of Sri Lanka’s budget do they control? According to one estimate, 75 per cent of Sri Lanka’s budget is controlled by the Rajapaksas.

What have they done with this control? Push their country deeper into debt. In 2007 the Sri Lankan government began borrowing heavily, guess who was leading the government at the time? The current Prime Minister Mahinda Rajapaksa, he was president in 2007. What Sri Lanka borrowed in 2007 makes up 38 of its foreign loans today. 15 years ago Sri Lanka was caught in a debt trap now it is sinking further how will they get out of it? The only viable option is an international monetary fund bailout, so far the IMF has bailed out Sri Lanka 16 times already.