In June, Prime Minister Ranil Wickremesinghe – who now says he is ready to step down as protesters raided his and the president’s residence over the country’s economic crisis – said Sri Lanka’s economy “ had completely collapsed”.
Sri Lanka is in the midst of its worst financial crisis in seven decades after its foreign exchange reserves fell to record lows as dollars ran out to pay for essential imports including food, medicine and fuel.
The government has recently taken drastic measures to deal with the crisis, including implementing a four-day working week for public sector workers to allow them time to cultivate their own crops. However, the measures do little to alleviate the hardship faced by many people in the country.
In several major cities, including the commercial capital, Colombo, hundreds of people continue to queue for hours to buy fuel, sometimes clashing with police and military as they wait. Train frequency has decreased, forcing travelers to squeeze into compartments and even sit precariously on them when commuting to work.
Patients cannot travel to hospitals due to fuel shortages and soaring food prices. Rice, a staple in the South Asian nation, has disappeared from the shelves of many stores and supermarkets.
Wickremesinghe, who took office days after violent protests forced his predecessor Mahinda Rajapaksa to resign, appeared to blame the country’s situation on the previous government in comments in June.
“It’s not an easy task to revive a country with a completely collapsed economy, especially one that is dangerously low in foreign exchange reserves,” he said. “If measures had at least been taken to slow the collapse of the economy at the beginning, we would not be facing this predicament today.”
Sri Lanka is relying mainly on neighboring India to stay afloat – it has received $4 billion in credit lines – but Wickremesinghe said that may not be enough either.
The next step, he said, was to reach an agreement with the International Monetary Fund (IMF).
“This is our only option. We have to take this path. Our objective is to hold discussions with the IMF and reach an agreement to obtain an additional credit facility,” Wickremesinghe said.
A bit of context: Over the past decade, according to Murtaza Jafferjee, president of the Colombo-based think tank Advocata Institute, the Sri Lankan government has borrowed huge sums of money from foreign lenders and expanded public services. As government borrowing increased, the economy was hit by major monsoons that hurt agricultural production in 2016 and 2017, followed by a constitutional crisis in 2018 and the deadly Easter attacks in 2019.
30% is bad luck. 70% is bad management,” he said.
In 2019, newly elected President Gotabaya Rajapaksa cut taxes in a bid to boost the economy.
“They misdiagnosed the problem and felt they had to give fiscal stimulus through tax cuts,” Jafferjee said.
In 2020, the pandemic hit, bringing Sri Lanka’s tourism-dependent economy to a halt as the country closed its borders and imposed lockdowns and curfews. The government ended up with a big deficit.
Shanta Devarajan, a professor of international development at Georgetown University and former chief economist at the World Bank, says tax cuts and economic malaise have affected government revenue, prompting rating agencies to downgrade the rating. Sri Lanka’s credit at near-default levels, meaning the country has lost access to foreign markets. .
Sri Lanka has dipped into its foreign exchange reserves to pay down public debt, reducing its reserves from $6.9 billion in 2018 to $2.2 billion this year, according to an IMF briefing.
The cash crunch has impacted imports of fuel and other essentials, and in February Sri Lanka imposed power cuts to deal with the fuel crisis that had sent prices skyrocketing , even before the ensuing global crisis when Russia launched an unprovoked invasion of Ukraine.
In May, the government let the Sri Lankan rupee float, effectively devaluing it by causing the currency to fall against the US dollar.
Jafferjee described the government’s actions as a “series of blunders after blunders”.
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CNN’s Rukshana Rizwie and Julia Hollingsworth contributed reporting for this post.