Sri Lanka Economy Is Falling Apart: Here Are The Reasons Why

By Remitbee - Apr 14, 2022

Overview: Sri Lanka's economic crisis has reached new heights, morphing from bad to worse every day.

For years, Sri Lanka has faced economic difficulties due to mismanagement, security problems, and a lack of political will to modernize and diversify the 22 million-strong South Asian nation. The situation has been at its worst in more than seven decades.

Within less than three months, the uncontrolled inflation has seen a surge in food prices by a 30 percent price margin in a tourism-dependent economy for the much-needed foreign income in an already desperate situation reeling from the adverse effects of the covid-19 pandemic.

Persistent power cuts, shortages in fuel, food, and other essentials are now the norm associated with a hard-currency crunch. The result has been widespread discontent protests calling for the president's resignation or, better still, the downfall of his inefficient government.

Discontent is worsened by the Rajapaksa family's management of the country as a family business. Their relatives hold senior positions in the regime. One of the ministers said the president is not ready to resign despite the mounting pressure locally and internationally.

What problems has Sri Lanka been facing?

Supplies of gloves, anesthetics, and catheters are running low. The persistent blackouts have inconvenienced and lowered doctors' morale, whose essential expertise remains crucial, especially in such a period of the global pandemic.

Energy disruptions forced the military to intervene in the long queues at filling stations. Some motorists left their cars in the middle of major highways. Ceylon petroleum, the state-owned corporation, increased the cost of petrol from 137 last year to 254 rupees currently, while diesel retailed at 176 from 104 rupees previously.

Many households have regressed to using kerosene or firewood as cooking gas is turning unaffordable, which has risen from 1493 to 2750 rupees in just one year for a 12.5 kg cylinder. Citizens are anticipating painful but social safety-oriented programs to cushion the poor. All businesses, mainly in the micro-enterprises segment, find it hard to keep going with the constant power disruptions.

The tourism sector that was slowly recovering is back to its lowest as the hotel association fights to save the industry. Colombo hotels register huge losses with mass protests in the city that survives on the catering and hospitality industry.

Many household incomes have been significantly depleted following the effects of covid-19 and the unregulated prices as the government 2021 removed controls on top of a failed agriculture policy of March 2020 with the ban of imports contributing jointly to the inflationary pressure.

Developed nations have even started issuing travel advisories for their citizens wishing to visit the island nation due to the economic crisis. The US state department issued an alert citing shortages in medicine and fuel.

What happened back in 2019?

Compared to food inflation of 2019, which stood at 1.4 percent, the prices have soared by an average of 30 times, and locally produced commodities have not been spared either, remaining unaffordable to many. Sri Lanka's staple food, white rice alone, has seen a 93 percent jump in two years. Many people have been pushed to despair and suffering as making a go of it has become a nightmare for the majority.

The central bank has eroded the value of the rupee by a 40 percent increase in the broad money supply for the last two years. Its purchasing power is now close to a worthless paper, one US dollar exchanging at 310 rupees with the expected restructuring of IMF debt ahead of talks.

What's the government's response to the situation?

An expert panel is now in place after commissioning by the head of state tasked with an advisory role and guiding the nation to an inclusive and sustainable recovery that will help avert a default to external debts amounting to $ 51 billion with the inability to raise more loans.

Another blow hit Gotabaya after his entire cabinet quit, followed by the central banks chief Ajith Nivard Cabraal. Bangladesh, India, and China are the major borrowing partners in mid-2021. The exchequer received a boost of 200m dollars for a credit facility it renewed last December.

This year, the treasury was appealing to China to reschedule the existing debt to a future date as disbursements from India of $ 500 million were to take care of oil purchases. A new finance minister has been appointed, and the incoming central bank governor is expected to hold a high-level meeting one day after taking office, despite demonstrators surrounding the parliament complex, which saw a state of emergency declared to maintain public order, which President Gotabaya Rajapaksa later vacated on Tuesday.

Sri Lanka's economic and political crisis could worsen as the Sinhala and Tamil New Year celebrations begin next week, increasing prices, a shortage of essentials, and no remedies. Protests grow as the public demands for the president and prime minister to quit go unanswered.

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