The Economic Collapse in Sri Lanka
Updated: Aug 1, 2022
Picture Credit: Zee News website
Experiencing the worst economic crisis since it gained independence, Sri Lanka hasn’t caught a break since 2019. While the entire world is suffering from the effects of the pandemic and undergoing high inflation, the Sri Lankan economy seemed to have crumbled under the weight of continuous stress; going from one of Asia’s fastest growing economies to a multi-layered nightmare.
The Sri Lankan economy may have started to lose its growth momentum sometime before the pandemic struck, but the pandemic did a considerable damage on it. When taking a closer look, one of the main reasons for Sri Lanka to be in such a state is the dependance and the sizable amount being spent on imports. The amount spent on imports is concerningly high compared to the country’s foreign currency reserve levels. Total imports for the first quarter of 2022 were US$ 5.7 billion compared to the foreign currency reserve of US$ 50 million.
The Asian Development Bank’s April forecast stated that the country’s economic growth will drop to 2.4% in 2022, and will only have a marginal improvement of 2.5% in 2023. Unfortunately, this was before the economic and political turmoil that followed, meaning, the forecast is more-than-likely to be an over-estimation as earlier this month the then-prime minister (now president) Ranil Wikremesinghe declared the country “bankrupt”, and facing a complete economic collapse.
Picture Credit: Daily FT website
It would be easier to understand just what happened to the economy if we examine the timeline and such things:
The first of the major occurrences started in April 2019 when the Easter bombings happened. This resulted in the tourism industry taking a blow. Tourism earnings (which amounted to 5% of Sri Lanka’s GDP in 2018) plunged.
December 2019 brought on a series of unprompted cuts on income taxes and increases for other taxes, such as the reduction of the value-added-tax (VAT), which went from 15% to a 18%, the income threshold was increased, meaning more people were exempted from personal income tax; less than 1% of the population are required to pay income tax. The share of government revenues in GDP fell drastically (12.65% to 9.17% by 2020), draining the already struggling economy.
Less than 2% of Sri Lankas’ government revenue comes from direct taxes, majority of government revenue is gained from indirect taxes (indirect taxes are imposed on normal commodity products, this means ordinary consumers are the ones who have to pay the tax) resulting in the rich getting richer and the poor getting poorer. A widening of the tax base and an increase of direct taxes is long overdue, according to experts.
In 2020, the pandemic hit and the world basically shut down, with borders being shut down globally. These pandemic driven restrictions on travel, worsened the situation for Sri Lanka’s economy, by stifling Sri Lanka’s tourist industry, among many others even further. Tourism, which used to contribute 5% to the GDP in 2018, dropped to an appalling 0.8% within 24months. Over 40,000 jobs had been lost, adding to the strain on the general public.
Bad policy also added to the creation of this economic disaster; in 2021, the government introduced a ban on chemical fertilisers. Although there were many warnings against this ban, it was announced in May, and by November all imported chemical fertilisers and agrochemicals were banned. The transition was supposed to take place during a period of at least 10 years. Sources claim that the ban was an attempt to counter the depletion of the country’s foreign currency reserves and save around $300-$400 million in foreign exchange.
However, being left with only organic fertilizers and no proper transition period, this resulted in a massive crop failure. The ban was lifted within seven months, but the damage had already been done. Yields had dropped down by 30%, and one third of Sri Lanka’s land had been left unused due to the unfortunate circumstances. Sri Lanka’s record of self-sufficiency in rice had also been ended. The ban ultimately resulted in Sri Lanka relying even more heavily on imports, further depleting reserves.
By April 2022, the public had had enough. Massive Island-wide protests were in full swing, calling for president Gotabaya Rajapaksa’s resigning.
In May 2022, then Prime minister Mahinda Rajapaksa stepped down and former PM Ranil Wickremesinghe was made Prime Minister.
June 2022 brought on a government-approved four-day work week, in order to allow citizens to grow their own food in the spare day due to the staggering increase in prices. The hyper-inflation has brought on a new level of strain on the people, with food inflation increasing over 57% in May.
July 9th holds great importance for the general public, as the president’s official residence was stormed by protesters. One of the most heavily guarded places in Sri Lanka, having never been open to the public, had lost its prestige and selectness. Thousands upon thousands of people stormed the premises for days, glimpsing the luxurious life that the president indulged in.
Former President Gotabaya Rajapaksa officially resigned on the 14th of July, after fleeing the country. Consecutively, PM Ranil Wickremesinghe became the acting President.
With Rajapaksa’s departure from the country, the public fury turned against the then acting president. There were reports of several protesters being injured in the aftermath of the police and military action taken against protesters. A human rights lawyer who once served with the UN and the Human Rights Commission in Sri Lanka, Ambika Satkunanathan had stated “The protest movement isn't slowing down and many Sri Lankans have realized the importance of their roles as citizens in holding those in power accountable."
On 20th July 2022, six-time Prime Minister, Ranil Wickremesinghe was elected as president in a crucial parliament vote, after receiving 134 votes opposed to 82 votes for his main opponent Dullas Alahapperuma. He took oath as the new president on the 21st.
Picture Credit: Dawn website
Fuel and gas ques are still in full swing along with the daily power cuts. The public spend days in line waiting for fuel. Many people have taken to using bicycles as their main mode of transport, instead of waiting in lines that seem to stretch across towns for days on end.
Sri Lanka is still very much struggling with the ongoing crisis, and experts predict that things will most likely worsen in the near future. There is a prevailing complete breakdown of trust between the general public and the political leadership, ensuing more political turmoil in the future to be expected. As for the economy, an IMF bailout is becoming essential for the economy’s recovery. The IMF will set strict restrictions, and even if the IMF can get the new government to make the new reforms which are needed in order to win-over the requested $3 billion bailout, IMF will most likely not disburse funds until Sri Lanka’s external debt is considered “sustainable”. It is unclear what the future holds for Sri Lanka.
August 1st 2022 | 7:30 PM