Sri Lanka is facing the worst economic crisis in its history, which has driven up prices and triggered food and fuel shortages across the country.
Since early March, the Sri Lankan the rupee fell almost 45% against the US dollar and its foreign exchange reserves fell to crisis levels.
Sri Lanka imports many essential items, but its inability to pay for them has led to shortages of food, fuel and baby milk.
While the country relied heavily on borrowing from China, which may have helped in the short term, it is now on the verge of sovereign debt default.
Power cuts used to alleviate the fuel crisis
The economic crisis has sparked protests across the country.
In February, essential food inflation rose 25% and headline inflation is close to 18%, as people were forced to queue for hours to buy fuel, amid soaring prices.
Unable to buy fuel, the Department of Energy announced a nationwide six- to seven-hour daily blackout, while supplies for buses and trucks were also rationed.
The war in Ukraine also caused global oil prices to rise, making it difficult for Sri Lanka to buy.
Why does the crisis occur?
Sri Lanka’s deep-rooted economic crisis went unaddressed for decades by successive governments.
Instead of tackling the problem head-on, he took the easier route by borrowing to overcome the problems and now has mounting debt and interest payments of nearly $12 billion.
This year, it must make $4 billion in such payments, further depleting its reserves.
Tourism generates more than $4 billion a year, but the industry has been hit hard by the covid pandemic.
The reckless and mismanaged economic policies of the Rajapaksa government have exaggerated the crisis and been blamed for the mess the country finds itself in.
Tax cuts, severe import restrictions and reluctance to introduce prudent economic reforms have laid bare the structural deficiency of the government’s economic policy.
With a severe balance of payments crisis, international agencies downgraded the country, further hampering any possibility of foreign investment.
The country is in a “debt trap”
Sri Lanka has now asked China to restructure its debt payments and support credit.
The government has requested a $1.5 billion line of credit from India to import essential goods. This amount is in addition to the billion dollars granted by India last month.
The country is set to reach out to the International Monetary Fund (IMF) and other countries for help.
However, the magnitude of the crisis is such that these loans may not be sufficient to get out of the balance of payments problems, as the current deficit is gigantic.
But for now, it is ordinary Sri Lankans who will bear the brunt of soaring prices and shortages of essentials for a long time to come.