In June, Prime Minister Ranil Wickremesinghe – who now says he was ready to step down when protesters invaded both his and the president’s residence over the country’s economic crisis – the Sri Lankan economy said. “Completely falling apart.”
Sri Lanka is in the middle the worst financial crisis in seven decadesafter its foreign exchange reserves plummeted to record lows, with dollars drying up to pay for essential imports including food, medicine and fuel.
The government has recently taken drastic measures in response to the crisis, including make a four-day work week for public sector workers so they have time to grow their own crops. However, the measures are doing little to defuse the struggles many in the country face.
In some major cities, including the commercial capital Colombo, hundreds of people continued to queue for hours to buy fuel, sometimes clashing with police and military as they waited. Trains have reduced frequency, forcing travelers to squeeze into compartments and even sit precariously on their heads as they commute to work.
Patients cannot go to the hospital due to lack of fuel and high food prices. Rice, a staple in the South Asian country, has disappeared from the shelves of many shops and supermarkets.
Wickremesinghe, who took office days after violent protests forced his predecessor Mahinda Rajapaksa to resign, appeared to have blamed the country’s situation on the predecessor government in comments in June.
“It is not easy to revive a country whose economy has completely collapsed, especially one with dangerously low foreign exchange reserves,” he said. “If at least steps had been taken to slow the economic collapse in the first place, we wouldn’t be facing this predicament today.”
Sri Lanka mainly relies on neighboring countries India to stay afloat — it received $4 billion in credit — but Wickremesinghe says that may not be enough either.
The next step, he said, is to reach an agreement with the International Monetary Fund (IMF).
“This is our only option. We must go this way. Our aim is to hold discussions with the IMF and come to an agreement to get an additional credit,” Wickremesinghe said.
Some context: Over the past decade, according to Murtaza Jafferjee, president of the Colombo-based Advocata Consulting Institute, the Sri Lankan government has borrowed large sums of money from foreign lenders and expanded public services. As government loans increased, the economy suffered major monsoons that hit agricultural output in 2016 and 2017, followed by a constitutional crisis in 2018and Deadly bombings on Easter 2019.
30% is unhappiness. 70% is mismanagement,” he said.
In 2019, newly elected President Gotabaya Rajapaksa cut taxes in an attempt to stimulate the economy.
“They misdiagnosed the problem and felt that they had to introduce a fiscal stimulus through tax cuts,” Jafferjee said.
In 2020, a pandemic occurs, brought Sri Lanka’s tourist-dependent economy to a halt as the country closed its borders and imposed lockdowns and curfews. The government runs a large deficit.
Shanta Devarajan, professor of international development at Georgetown University and a former World Bank chief economist, said tax cuts and the volatile economic situation have hit government revenue, causing rating agencies to downgrade Sri Lanka’s credit rating to near default levels – meaning the country lost access to foreign markets.
Sri Lanka has reduced foreign exchange reserves to repay government debt, reducing reserves from $6.9 billion in 2018 to $2.2 billion this year, according to an IMF press conference.
The cash crunch affected imports of fuel and other necessities and in February Sri Lanka introduced power cuts in response to the fuel crisis that sent prices soaring. even before the global crisis that followed. Russia launched an unprovoked invasion of Ukraine.
In May, the government floated the Sri Lankan rupee, effectively devaluing it by sending it plunging against the US dollar.
Jafferjee described the government’s moves as a “mistake after mistake.”
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CNN’s Rukshana Rizwie and Julia Hollingsworth contributed reporting to this post.
