Colombo, Sri Lanka –
Sri Lanka’s president, who announced he would step down on Wednesday, has left the country after months of chaos that culminated when protesters gathered at the presidential palace. Here’s what’s happening in Sri Lanka:
- The country is going bankrupt
- Daily necessities including food and medicine are scarce
- Political corruption has deepened trust in the government
- Dual government uncertainty and economic uncertainty are complicating the recovery
Sri Lanka’s prime minister, who has said he will step down once a new government is formed, said the island nation’s indebted economy has “collapsed” because it has no money left to pay for food and fuel. and medicines. It is relying on help from neighboring India, China and from the International Monetary Fund.
Outgoing Prime Minister Ranil Wickremesinghe, who took office in May, is highlighting the enormous task he faces in turning an economy he sees as heading towards a “rock bottom”.
Sri Lankans are skipping meals as they endure shortages, queuing for hours to try to buy scarce fuel and cooking gas. It was a stark reality for a country with a rapidly growing economy, with a growing and comfortable middle class, until the latest crisis deepened.
Here is the situation in Sri Lanka:
HOW SERIOUS IS THIS CRISIS?
The government owes $51 billion and cannot pay interest on its loans, let alone the amount borrowed. Tourism, a key driver of economic growth, has collapsed because of the pandemic and safety concerns following terrorist attacks in 2019. And its currency has crashed 80% of the time, sending thousands of dollars crashing down. Imports became more expensive and exacerbated already out-of-control inflation, along with food costs rising 57%, according to official data.
The Finance Ministry said Sri Lanka has only $25 million in usable foreign exchange reserves. It needs $6 billion to survive the next six months.
The result is a country on the verge of bankruptcy, with almost no money to import gasoline, milk, cooking gas, medicine and even toilet paper.
What role does POLICY play?
Economists attribute the crisis to domestic factors such as mismanagement and years of corruption.
Much of the public outrage has focused on President Gotabaya Rajapaksa and his brother, former Prime Minister Mahinda Rajapaksa. The second resigned after weeks of anti-government protests that eventually turned violent.
In April 2021, Rajapaksa abruptly banned the import of chemical fertilizers. The promotion of organic farming caught farmers by surprise and rice crops withered, causing prices to soar.
The government needed to increase revenue as foreign debt for large – and problematic – infrastructure projects skyrocketed, but instead Rajapaksa passed the largest tax cut in Sri Lanka’s history. Creditors have downgraded Sri Lanka’s rating, preventing it from borrowing more money as its foreign exchange reserves dwindle.
HOW DOES IT REALLY AFFECT HUMANS?
Normal tropical Sri Lanka has no shortage of food but people are hungry. The UN’s World Food Program says nearly nine out of 10 families are skipping meals or eating poorly, while 3 million people are receiving emergency humanitarian aid. \
The war in Ukraine pushed up food and oil prices. Inflation is near 40% and food prices have increased by nearly 60% in May.
Doctors used social media to try to get supplies of vital equipment and drugs. They also warn people to do whatever it takes to avoid getting sick or having an accident. More and more Sri Lankans are looking for a passport to go abroad for work. Government employees have been given an extra day off for three months so they have time to grow their own food. In short, people are suffering and desperate for things to improve.
WHAT DOES THE GOVERNMENT DO ABOUT IT?
This is Wickremesinghe’s sixth term as prime minister. His appointment is one of many moves to build confidence in the government and get the economy on track as protesters demand an end to Rajapaksa’s reign.
So far, Sri Lanka has been struggling, mostly backed by a $4 billion line of credit from neighboring India. An Indian delegation was in Colombo on June 23 to negotiate more assistance, but Wickremesinghe cautioned against expecting India to keep Sri Lanka alive for long.
Earlier in June, the United Nations began a worldwide public appeal for assistance. So far, the projected funding has barely scratched the surface of the $6 billion the country needs to sustain over the next six months.
Wickremesinghe told the Associated Press in a June 12 interview that he would consider buying more heavily discounted oil from Russia to help the country weather the crisis.
Some policies that contributed to the economic damage have been reversed, including a 2019 tax cut and last year’s ban on chemical fertilizer imports, but it will take time before any impact becomes apparent.
WHAT’S NEXT FOR SRI LANKA?
“Sri Lanka has its last hope on the IMF,” said a recent headline in the Colombo Times. The government is in talks with the IMF about the bailout plan, and Wickremesinghe said on June 22 that he expected to have a preliminary agreement with the IMF by the end of July. But that also affects the alternative. him and a new government was formed.
Political corruption is also a problem; not only did it play a role in the country squandering its wealth, but it also complicates any financial rescue for Sri Lanka. Sri Lankan leaders agreed that lawmakers would elect a new president on July 20 but struggled on Tuesday to decide on forming a new government.
Anit Mukherjee, a policymaker and economist at the Center for Global Development in Washington, said any assistance from the IMF or the World Bank must come with strict conditions to secure the aid. not mismanaged.
However, Mukherjee notes that Sri Lanka is located on one of the world’s busiest shipping lanes, so letting such a strategically important country collapse is not an option.
