SRI LANKA’S ECONOMIC CRISIS – WHAT REALLY HAPPENED

SRI LANKA’S ECONOMIC CRISIS – WHAT REALLY HAPPENED

As of late, protestors in Sri Lanka crowding and vandalizing the presidential palace had made headlines. Amidst this, they demanded that Ranil Wickremesinghe resign from his post of Prime Minister. The eighth president of the country, Gotabaya Rajapaksa, was additionally forced to resign, and fled to Singapore. He appointed Wickremesinghe as the acting president, who has been trying to stabilize the situation in Sri Lanka.

What had angered the people?

In 2021, the Sri Lankan government had to declare “the worst economic crisis in the country” in 73 years.

This crisis has resulted in an erratic power supply with a shortage of electricity, fuel and cooking gas. Over 500 bakeries were shut due to the lack of cooking gas. The Civil Aviation Authority published an advisory requesting international airlines to carry extra fuel if they fly into Sri Lanka.

People are being forced to form long queues for basic supplies such as petrol, diesel or even food. Not to mention, there have been reports of people dying in these queues.

Currently, only vehicles used for carrying medical services and food are allowed to obtain fuel.

Moreover, critical surgeries in hospitals are being halted.

So, what exactly happened for the island paradise to be in such a critical situation?

Mismanagement of the country

Gotabaya Rajapaksa had started out as a wonderful leader. The Government, under his presidency, promised huge tax cuts which included the abolishment of the Pay as You Earn (PAYE) tax, and nation building tax which funded the development of infrastructure in the country. The Central Bank of Sri Lanka (CBSL) printed hefty sums of money. In 2021, the CBSL printed a confounding amount of 1.2 trillion rupees.

The tax cuts were opposed by Mangala Samaraweera, the former Finance Minister of Sri Lanka. He believed that it would be dangerous considering the country’s lower tax revenue when compared to other countries along with its high debts. The International Monetary Fund advised the Government to stop printing money, hike interest rates and taxes, and reduce spendings to prevent a potential economic meltdown.

However, these warnings were ignored by the CBSL which continued to print money. In merely the first quarter of 2022, the country printed roughly 588 billion rupees.

Tea and rice are two major foreign exchange sources for Sri Lanka. Tea earned a revenue of 466 billion rupees in 2021. Meanwhile, rice has been a staple food for about 21.8 million Lankans. Both these crops require chemical fertilizers and pesticides.

Rajapaksa argued that these chemicals led to adverse health effects such as the Chronic Kidney Disease of unknown etiology (CKDu). With the aim of making Sri Lankan farming completely organic, he banned fertilizers and pesticides.

The issue arose due to the decision being made without a warning, even though rice farming was the livelihood of over 1.8 million farmers. Naturally, production and exports of both the crops fell by a substantial amount. The government had to spend millions on subsidies and compensation for all the farmers.

This proved detrimental to Sri Lanka, a country that followed an agrochemical-heavy food system. The tea industry has at present faced problems due to the Russo-Ukrainian war since Russia was said to be Sri Lanka’s second largest tea market.

The decline in rice production naturally impacted the food supply of the country. The Government under Rajapaksa declared an economic emergency in August 2021 to contain the soaring inflation while also maintaining the country’s food supply of staple crops in Sri Lanka, including rice. Although the ban on fertilizer imports was revised, the damage had already been done.

However, the current crisis did not start with Rajapaksa bringing about tax cuts.

Other factors

On 21 April 2019, three churches and hotels in Colombo were victims of what is now known as the Easter Bombings. Nearly 300 people, including foreign nationals and police officers were killed, and at least 500 were injured. This reasonably scared tourists; many of whom opted not to visit Sri Lanka.

With the onset of the pandemic in 2020, tourism declined. It had affected the revenue earned from tourism in 2019 which declined even further the next year. This posed a major problem as tourism was one of Sri Lanka’s largest foreign exchange earners.

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