The Sri Lankan Economic Crisis
Sri Lanka's inflation slowed this month for the first time in a year as shortages of food and fuel eased. But before we celebrate, let us make sure we understand what caused such economic turmoil.
Sri Lanka has been a nation well-known for many reasons – its connection to Hindu mythology and its vibrant tourist locations – but none more than its ongoing economic crisis. The crisis triggered a situation resembling a revolution in the island nation. So, along with a crumbling economy, our friends down South dealt with an eminent governmental breakdown. Just to remind you, right before the pandemic, although Sri Lanka was still a poor country, it was relatively stable and had growth potential. Post-pandemic things just went downhill.
How did it get this bad? The answer is the Rajapaksa brothers.
In November 2019, Gotabaya Rajapaksa was re-elected to the Presidential office. He then appointed his brother, Mahinda Rajapaksa, as both Prime Minister and Finance Minister. Immediately he introduced major tax cuts – paying less money sounds nice but taxes are also the country’s primary source of income. The GDP fell.
Still, Sri Lanka had formidable agricultural trade, and a flourishing tourism sector – so not all hope was lost. Except, Gotabaya didn’t stop there: in April 2021, he went on to ban the import and usage of all chemical fertilisers with an aim to go organic. What followed was disastrous: crops failed, and the people were starving. Sri Lanka, one of the world’s biggest exporters of rice, was forced to import it. Also, in a bid to please the Sinhalese Buddhists, a primary vote bank, the country started strengthening their ties with China. Huge Chinese loans were taken to fund infrastructure and the military.
Taxes gone. Trade gone. All that was left was tourism. And then, the pandemic.
The tourism sector, took a massive hit, leading to an even steeper fall in the GDP. In this time of crisis, the government did what it does best - more loans. In 2021, Bangladesh and India loaned $700 million to Sri Lanka. While it seemed for a while that the country may recover, come 2022 – Gotabaya devalued the Sri Lankan Rupee. This led to massive inflation and subsequent panic among the people.
Following the massive protests demanding the Rajapaksa family to resign, they resigned from their Ministerial portfolios. Later in July 2022, President Gotabaya fled the country and stepped down. The current head of the government since 22 July 2022 is Incumbent Dinesh Gunawardena.
Though some progress has been made since the change in leadership, the people are still suffering. Insanely successful and efficient reforms will be required for tangible improvement.