What will happen next, why Sri Lanka's economy collapsed?

The island nation’s debt-ridden economy has “collapsed,” according to Sri Lanka’s prime minister since it is unable to pay for food and fuel. It is requesting assistance from its neighbors, China and India, as well as the International Monetary Fund, due to a lack of funds to pay for the importation of such goods and existing debt default.
The newly-elected prime minister, Ranil Wickremesinghe, stressed the enormous challenge he faces in turning around an economy that is, in his words, “headed for rock bottom.”

Due to shortages, Sri Lankans are skipping meals and waiting hours in line to try to purchase precious fuel. It’s a sobering truth for a nation whose economy had been rapidly rising, with a sizable and comfortable middle class, before the most recent crisis grew worse.

How critical is this situation?

The government owes $51 billion and is unable to pay its debts, let alone make interest payments on its loans. Due to the pandemic and worries about safety following a string of terrorist attacks, tourism, a key driver of economic growth, has faltered.

Additionally, its currency has fallen by 80%, making imports more expensive and escalating the already out-of-control inflation, with food prices soaring by 57%, according to official figures.

As a result, the nation is rapidly approaching insolvency and has no money to import toilet paper, milk, gasoline, or other necessities.

Another issue is political corruption, which not only contributed to Sri Lanka’s mismanagement of its resources but also makes any financial rescue efforts more difficult.

Any support from the IMF or World Bank should come with severe limitations, according to Anit Mukherjee, a policy scholar and economist at the Center for Global Development in Washington. This is to prevent the funds from being improperly managed.

Mukherjee emphasized that it is not an option to allow a nation of such strategic importance to disintegrate because Sri Lanka is situated in one of the busiest shipping lanes in the world.

How does it impact actual people?

How does it impact actual people?

Although there is always plenty of food in tropical Sri Lanka, some people are going hungry. According to the U.N. World Food Program, nearly nine out of ten households stretch their food by skipping meals or making other sacrifices, while 3 million people get immediate humanitarian relief.

To obtain essential supplies, doctors have turned to social media. An increasing number of Sri Lankans are applying for passports to work abroad. For three months, government employees will receive an extra day off so they can cultivate their food. In other words, people are in pain and desperately want things to be better.

What is causing the economy’s poor situation?

According to economists, internal issues including years of poor management and corruption are to blame for the catastrophe.

President Gotabaya Rajapaksa and his brother, former Prime Minister Mahinda Rajapaksa, have drawn a lot of criticism from the people. After weeks of anti-government rallies that eventually turned violent, the latter resigned.

The last few years have seen a decline in the situation. Over 260 people were killed in Easter suicide attacks at hotels and churches in 2019. That ruined tourism, a significant source of foreign currency.

What is causing the economy's poor situation?

As the foreign debt for significant infrastructure projects rose, the government needed to increase its revenue, but Rajapaksa instead pushed through the biggest tax cuts in Sri Lankan history. (Recently, the tax cuts were undone.) As Sri Lanka’s foreign reserves decreased, creditors reduced its ratings, preventing it from borrowing further money. The epidemic was followed by a subsequent decline in tourism.

Rajapaksa abruptly outlawed the importation of chemical fertilizers in April 2021. Farmers were caught off guard by the push for organic farming, which devastated their primary rice crops and raised prices. The importation of other goods perceived to be luxury was also prohibited to conserve foreign currency. In the meantime, rising food and gasoline prices are a result of the conflict in Ukraine. Inflation in May reached close to 40%.

Why did the prime minister claim that the economy is in a state of collapse?

Why did the prime minister claim that the economy is in a state of collapse?

Such a direct statement may erode any faith in the health of the economy, and it didn’t correspond to any fresh information. As his government requests assistance from the IMF and faces criticism for the lack of progress since he entered office a few weeks ago, Wickremesinghe seems to be highlighting the difficulty his government faces in turning things around. His remark may have been made to purchase more time and support while he works to revive the economy.

Sri Lanka barely has $25 million in viable foreign reserves, according to the Finance Ministry. Due to this, it no longer has the resources to pay for imports or to pay off its massive debt. The Sri Lankan rupee has lost value in the meantime, falling to approximately 360 to the dollar. This raises the cost of imports to an even higher level. Out of the $25 billion that must be repaid by 2026, Sri Lanka has put on hold the repayment of nearly $7 billion in foreign loans due this year.

How is the government addressing the issue?

How is the government addressing the issue?

Wickremesinghe has a wealth of knowledge. He has served as prime minister for six consecutive terms.

Sri Lanka has so far managed to get by thanks primarily to $4 billion in credit lines from nearby India. Wickremesinghe cautioned against placing too much hope in India to sustain Sri Lanka for an extended period as an Indian delegation visited the country’s capital, Colombo, on Thursday to discuss additional aid.

The Colombo Times’ headline on Thursday read, “Sri Lanka casts final hopes on IMF.” Wickremesinghe stated on Wednesday that he anticipates reaching a preliminary deal with the IMF by the end of July. The government is now in talks with the IMF over a bailout package.

The government is also asking China for further assistance. Several other governments, including those of the United States, Japan, and Australia, have contributed an additional few hundred million dollars.

The United Nations launched a public assistance appeal earlier this month.

The $6 billion that the country needs to survive over the next six months is currently barely scratched by planned financing.

Wickremesinghe recently informed the Associated Press that he would think about purchasing more deeply discounted oil from Russia to help Sri Lanka get through its crisis to address the country’s fuel shortfall.

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