Sri Lanka’s financial crisis is the worst that the country has faced since its independence in 1948 and has included a steep increase in the amount of debt that the country owes, and extremely high rates of inflation. Although the peak of the crisis occurred in the spring and summer of 2022, the country is still dealing with the effects of the disastrous period and is slowly starting to try to work towards some forms of solution to help heal the broken economy and repair the damage that was caused.
How did the financial crisis happen?
The current economic crisis in Sri Lanka is thought to have started in 2019, however Sri Lanka has been facing economic problems for many years. It has received bailout by the International Monetary Fund (IMF) twice in the last decade: once in 2009 (after the end of their civil war) and once more in 2016, with the promise that Sri Lanka’s government would aim to control its debt to return to 5% of the country’s GDP by 2021. However, rather than the economic situation improving at the start of the 2020s, Sri Lanka’s economy has worsened, to the point where, in May 2022, it was forced to default on its foreign debt (meaning that they failed to pay back the money that they owed according to the initial agreement).
There are many factors that can be attributed to the start of the financial crisis, but most of them link back to the president at the time, and many of the decisions he made and policies which he put in place. Gotabaya Rajapaksa served as president from November 2019 until July 2022, and was part of the Sri Lankan Podujana Peramuna party (SLPP) (which was founded by his own brother) and was put forward by the party as presidential candidate in 2019. The party promised stability and progress after the turmoil and uncertainty people felt after the 2019 Easter bombings (where suicide bombers killed hundreds during attacks on churches and luxury hotels), and because of their strategic campaigning, the SLPP won the election by a landslide vote, securing 145 out of 225 seats. However, as soon as he won the election, Rajapaksa was able to appoint other members of his family to government positions such as finance minister, and even appointed his own brother (who had been defeated in the 2015 presidential election) as prime minister of the country. The amount of power which the Rajapaksa family held allowed them to put into place many unwise policies, which had widespread and disastrous effects on both the people and economy of Sri Lanka.
This government greatly decreased taxes (the Goods and Services Tax rate was cut from 15% to 8%) and income tax brands were altered, meaning that there was a 33.5% decrease in the number of taxpayers. This is estimated to have lost the government over $1.4 billion a year, and therefore the amount of debt which they owed increased, contrary to their agreement with the IMF. The government also ordered a sharp transition to organic farming, and banned all synthetic fertilisers in 2021, without providing any support to farmers, which led to a massive decrease in crop exports, further contributing to the burgeoning financial crisis. In early 2022, this crisis greatly worsened, and the rate of
inflation grew to 50%. The country also experienced many shortages of necessities such as food, electricity and fuel, meaning many vehicles such as ambulances or emergency services could not be used, as there was not enough fuel to power them.
Whilst there were factors outside the government that can be said to have been a cause of the financial crisis, such as the lack of tourism from the COVID-19 pandemic and tourists’ fear to travel to Sri Lanka after the Easter 2019 bombings, the majority of Sri Lankans blame the government for the failure of the economy. As a result, many have protested against the Rajapaksa government, and after following violent protests on the 9th of July 2022, Gotabaya Rajapaksa fled the country on the 13th of July.
What are the next steps for Sri Lanka?
The current president, Ranil Wickremesinghe is working towards a solution to the financial crisis, however, it will certainly not be an easy resolution. Tax rates have been increased and the government is working to be able to pay off all debts, however the country owes a total of $46.9 billion, which will take a long time to be able to be paid off on the current terms. 52% of the country’s total foreign debt is owed to China, its biggest lender, and Sri Lanka has recently reached a deal with them to restructure £3.4 billion of debt (meaning that the terms of the debt are altered to make it easier to pay back) – a big step in the journey to heal Sri Lanka’s broken economy.
Bibliography: Timeline of Sri Lanka’s worst economic crisis since independence | Business and Economy News | Al Jazeera Sri Lanka attacks: What we know about the Easter bombings – BBC News Sri Lanka’s Financial Crisis: Origins, Impact, and Next Steps (cornell.edu) Sri Lanka crisis: Colombo reaches debt deal with China – BBC News Gotabaya Rajapaksa | Sri Lanka, Family, & Biography | Britannica Sri Lanka: Why is the country in an economic crisis? – BBC News
