All you need to know about the economic crisis in Sri Lanka

The worst economic downturn to drive dissent since the South Asian nation gained independence in 1948, crippled inflation skyrocketed commodity prices.

Here’s what you need to know.

Experts say the crisis spanned several years, creating some misfortune and massive government mismanagement.

Over the past decade, the Sri Lankan government has borrowed large sums of money from foreign lenders to provide public services, said Murtaza Zafarji, chair of the Colombo-based think tank Advocate Institute.

This borrowing trend has been matched by a series of hammer blows to the Sri Lankan economy, from both natural disasters – such as heavy rains – to man-made disasters, including government bans on chemical fertilizers that destroy farmers’ crops.

These issues were compounded in 2018, when the President fired the Prime Minister, giving rise to a constitutional crisis; The following year, when the 2019 Easter bombing killed hundreds of people in churches and luxury hotels; And from 2020 with the advent of the Covid-19 epidemic.

Faced with a huge deficit, President Gotabaya Rajapaksa has cut taxes in a destructive effort to stimulate the economy.

But the move is counterproductive rather than hurting government revenue. This prompted rating agencies to downgrade Sri Lanka to almost the default level, meaning the country has lost access to foreign markets.

Sri Lanka then had to fall behind in its foreign exchange reserves to repay government debt, which had shrunk from $ 6.9 billion in 2018 to 2 2.2 billion this year. This affects the import of fuel and other essential commodities, causing prices to rise.

On top of all this, the government floated the Sri Lankan rupee in March – meaning its value was determined based on the demand and supply of the foreign exchange market.

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

However, the rupee’s depreciation against the US dollar has only made things worse for ordinary Sri Lankans.

What does this mean for humans on the ground?

For Sri Lankans, the crisis has turned their daily lives into an endless cycle of waiting in line for basic commodities, many of which are being rationed.

In recent weeks, stores have been forced to close because they cannot operate refrigerators, air conditioners or fans. Soldiers are stationed at gas stations to calm customers, who line up for hours in the sweltering heat to fill their tanks. Some have died while waiting.

Sri Lanka is sending troops to fuel stations amid a growing economic crisis

A mother in the capital Colombo told CNN she was waiting for propane gas so she could cook for her family. Others say the price of bread has more than doubled, while autorickshaw and taxi drivers say fuel rations are too small to make a living.

Some are caught in an impossible position – they have to work to feed their families, but also to line up for supplies. A street sweeper with two young boys told CNN he left work to join the line for food before returning quickly.

Even middle-class members with savings are frustrated, fearing they may run out of essentials like medicine or gas. And frequent power outages make life more difficult which plunges Colombo into darkness, sometimes for more than 10 hours at a time.

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

What is happening with the protest?

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

Police used tear gas and waterers to suppress protests and later issued a 36-hour curfew. President Rajapaksa declared a nationwide state of emergency on April 1, authorizing authorities to detain people without a warrant, and blocking social media platforms.

But the next day the protests go ahead by disobeying the curfew, inspire hundreds of protesters to arrest hundreds of protesters.

Protests have continued since then, although they have been largely peaceful. On Tuesday night, a mob of student protesters again surrounded Rajapaksa’s residence, calling for his resignation.

The emergency ordinance was withdrawn on 5 April.

A protester protests outside the president's private residence in Colombo, Sri Lanka, on March 31.

What is happening with the cabinet?

The entire cabinet of the government was effectively dissolved on 3 April due to the mass resignation of the top ministers.

About 26 cabinet ministers, including the president’s nephew, resigned that weekend, criticizing the apparent social media blackout that he would “never forgive.” Other bigwigs, including the central bank governor, have also resigned.

Faced with an administration in turmoil, the president on Monday tried to make a reshuffle he hoped would calm the opposition. Four ministers, including a finance minister, were appointed to run the government temporarily, and several more were handed over in a presidential press release in an effort to keep the country afloat “until a full cabinet is appointed”.

But just a day later, the caretaker finance minister resigned – explaining that he had taken the position only because of “many requests” and that he later realized that “new and active and unconventional measures need to be taken.”

And the reshuffle has failed to stop further abandonment. The ruling Sri Lanka People’s Front Coalition (also known as Sri Lanka Podujana Peramuna) lost 41 seats on Tuesday as members of several partner parties withdrew to continue as independent groups. The coalition lost its majority in parliament and retained only 104 seats.

What did the government say?

President Rajapaksa issued a statement Monday but did not speak directly about the resignation, calling on all parties to “work together in the interests of all citizens and future generations.”

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

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

Earlier, Rajapaksa said he was trying to resolve the issue, saying in a speech 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 a former president himself – told CNN that it was wrong to say the government had mismanaged the economy. Instead, Covid-19 was one of the reasons, he said.

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

What next?

Sri Lanka is now seeking financial assistance from the IMF and is leaning towards regional powers that may be able to help.

During last month’s speech, President Rajapaksa said he considered the pros and cons of working with the IMF and decided to pursue a bailout from the Washington-based organization – which his government was reluctant to do.

Sri Lanka has also appealed to China and India for help, with New Delhi already issuing a $ 1 billion credit line in March – but some analysts have warned that the aid could prolong rather than resolve the crisis.

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

CNN’s Julia Hollingsworth, Rukshana Rizvi and Iqbal Athas contributed to the reporting.

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