How did Sri Lanka fall into an economic and political crisis? [Explained]

[1] People waiting for hours to refill liquefied petroleum gas cylinders

The price of sugar has risen up to 166% per KG, the price of coconut oil has increased by 209%, the price of a single egg has increased by 76%, the price of milk powder has risen up to 58%, petrol price up to 58% per Liter. With rising costs of food, fuel, and medicine, long power cuts, currency shortage, inflation, huge piles of foreign debt, and rapid depletion of forex reserves, Sri Lanka is facing its worst economic and political crisis since its independence in 1948. The Finance Minister has been sacked, Cabinet Ministers have resigned, and the call for the President’s resignation is becoming louder. As the protests intensify, the rest of the world is left wondering, “How did Sri Lanka get here?”. Let’s find it out about Sri Lankan Economic and Political Crisis.

Sri Lankan Economic and Political Crisis

[2] Gotabaya Rajapaksa

According to experts, the crisis has been years in the making, driven by a combination of bad luck and government incompetence. And the roots of this crisis are way back in late 2019, when President Gotabaya Rajapaksa implemented tax cuts that caused a nearly 30 percent drop in government tax revenue just months before the Covid-19 pandemic hit the world. This type of tax structure was a major turn away from the previous government’s budget consolidation plan. And this resulted in the worst budget deficit the country has ever experienced.

Then, in early 2020, the Covid-19 pandemic worsened the revenue shortage by disrupting Sri Lanka’s most important source of foreign currency: tourism. In addition, some nations, notably Canada, have lately imposed travel restrictions on their citizens visiting the country due to the foreign exchange crisis. These types of warnings and restrictions from other countries also harmed the business as a whole. With the pandemic and the following lockdowns being worldwide phenomena, remittances from abroad, which had previously been a vital source of foreign exchange for Sri Lanka, decreased hugely by about 23% as many workers lost their jobs. So, sources of foreign currency have shrunk significantly due to the Covid-19 pandemic and government decisions.

Moreover, while its foreign exchange revenue is falling, Sri Lanka also has foreign debt obligations of $7 billion approximately, which has increased in part due to loans from China to support ambitious development projects. They have a debt burden of roughly $5 billion to China alone. It owes India and Japan a significant amount of money as well.

[3] Sri Lanka’s debt

While Sri Lanka’s access to foreign exchange was restricted, Colombo continued to satisfy debt repayments with existing foreign-exchange reserves during this period. And as a result, Sri Lankan forex reserves dropped from over $7.6 billion in 2019 to roughly $2.3 billion in February 2022. This drop in forex reserve impacted Sri Lanka’s reliance on imports of foods, fuel, medicines, and other essential goods, as the country lacks foreign currency to pay for import expenses.

On top of that, the government’s decision to ban the use of chemical fertilizers to go 100% organic farming had a catastrophic impact on agricultural growth and the economy, as organic farming reduced productivity by nearly half. As a result, it triggered the farmers’ protests and increased the cost of foods like rice, vegetables, fruits, and tea. In addition, the limitation of imports for other staple goods due to reduced forex reserves worsened the situation and raised the price of foods and other necessities.

[4] Anti-government protest in Sri Lanka on April 13, 2022, in front of the Presidential Secretariat

Sri Lanka is now seeking financial assistance from the IMF and looking to regional powers such as India and China for assistance. In conclusion, Sri Lanka is suffering from a foreign currency shortage, which is severely reducing its ability to import essential goods. In addition, the new tax plan, the government’s decision to ban the use of chemical fertilizers, and the recent failure of the tourism industry due to the Covid-19 pandemic are all contributing to the current crisis.


Thumbnail Image, 4: AntanO, CC BY-SA 4.0, via Wikimedia Commons
1: By AntanO - Own work, CC BY-SA 4.0, , via Wikimedia Commons
2: By Government of India -, GODL-India
3: The Diplomat