The Economic Crisis of Sri Lanka Explained

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Following a period of fervent civil society protests against Sri Lanka’s declining economy and
deteriorating economy, president Gotabaya Rajapaksa agreed to appoint an interim council on
Friday to oversee the creation of an interim administration. The resolution is expected to form a
coalition comprised of all the parties in Parliament, and will end the control that the family of
Rajapaksa, which is in charge of the country. It is about the economic outlook of the country and
its financial situation, which is in crisis following the default on repayments for its massive
foreign loans, estimated at $50 billion and in the very first instance ever since Sri Lanka
achieved its independence from British in 1948.

Signs of Sri Lanka’s imminent economic collapse became evident over the past two years
following the Covid-19 epidemic as food prices increased as power outages became more
frequent. Sri Lanka currently has about $7 billion of debt due in the year – Sri Lanka Economic Crisis

Many have attributed the economic woes of Sri Lanka to the poor handling of their finances over
the years by various governments, resulting in the growing foreign debt as well as the constant
construction projects. The Rajapaksa government also implemented radical tax cuts in the year

2019 by slashing the value-added tax (VAT) percentage — which was the amount of tax that is
applied to domestic and imports by 15 percent to just 8 percent, which resulted in an increase in
revenue for the country.

The president’s elder brother Mahinda Rajapaksa is likely to be removed from the post of prime
minister under an agreement mediated through former President Maithripala Sirisena, who
defected along with many fellow members from the President’s ruling party in April, in protest at
the Rajapaksas poor governance.

But the power struggle in the country could have created tension within the brothers, which
could lead to a worsening of the political impasse. On Friday The Associated Press reported an
official spokeswoman for the Prime Minister could not immediately confirm the older
Rajapaksa’s resignation but stated that any such decision will be announced by the prime
minister when it is appropriate.

It continued to pile up foreign debt, but without enough revenue.

The main cause of Sri Lanka’s economic woes is its soaring foreign debt specifically to finance
its rapid turn towards infrastructure development under the former president Mahinda
Rajapaksa, who was the older brother of the Rajapaksa family and twice prime minister. As its
finances were already dripping, Sri Lanka took out large investment loans from the state-owned
Chinese banks to finance its infrastructure projects, including the controversial port development
located in the Hambantota district. Hambantota district.

It was believed that the Sri Lankan government justified the Hambantota development as a way
to increase its economic growth as a bustling hub of trade similar to Singapore. The project,
however, was plagued with corruption and stagnation, and Sri Lanka eventually handed the
control of the port over to China as collateral because it could not repay the loans it had made.

Over the past 10 years, Sri Lanka amassed an amount of $5 billion to China in the sole
instance, which made an enormous portion of its total foreign debt, as per The New York Times.
Sri Lanka’s huge debt to China as well as the Hambantota project’s failure is frequently
considered to be an example of “debt book diplomatic machinations” in the past that China has
pursued over the last few years.

There is a belief that China has expanded its approach to monetary diplomacy with its
expansive Belt and Road Initiative (BRI) which is an international infrastructure project that
involves Chinese investment in infrastructure projects in various parts of Asia, Africa, and
Europe as part of China’s plan to grow its global influence as an increasing economic power.
There are a variety of nations who have signed on to China’s BRI project is not clear and ranges
from 139 between 139 and 146 which includes Sri Lanka.

While an infrastructure development on this scale could offer some benefits for those involved,
however, the BRI has evolved into an important strategy for China to increase its influence
against economically weak nations across the Asia-Pacific region. A minimum of 16 countries

participating in the BRI project are saddled with millions of dollars of debt that China has then
leveraged in accordance with an independent study by the Harvard Kennedy School for the US
State Department.

Around 22% of the debt in Sri Lanka is due to institutions and bilateral creditors. financiers from
other governments in accordance with CNBC. Neighboring India has been seeking to expand its
cooperation bilaterally and cooperation with Sri Lanka partly as an attempt to increase its
influence over South Asia over China. India recently granted Sri Lanka a $1.5 billion credit line
to ease the country’s fuel crisis, in addition to an additional $2.4 billion in the currency swap and
loan deferment in January.

In the wake of the country’s accumulation of debts abroad, the tourism industry — which was
previously a $4.4 billion business and a major source of income for the island was hit
repeatedly. In 2019, the tourism industry suffered following the church bombings which killed
more than 300 people, which included foreign residents.

The following year it was the year the Covid-19 epidemic halted tourism and other major
sectors, leading to the global economy slowing. While Sri Lanka saw some increase in the
number of foreign tourists last year the ongoing outbreak, coupled with the Russian attack on
Ukraine — both of which were the major sources of tourism in Sri Lanka before the conflict -was
slowing the growth of the sector.

An intensifying crisis led to massive protests

The country’s problems grew more serious in March when it was announced that the Sri Lankan
government announced an hour-long power outage as a means to save energy in the current
crisis. In the absence of power, the majority of people were unable to complete their tasks while
the economic downturn continued and triggered mass protests. Many people from Sri Lanka
protested during the months after the power shortages to protest the nation’s growing crisis.

On April 1st president Rajapaksa announced an emergency in the face of the protesters is
escalating in violence against police. In all, the Sri Lankan government Cabinet quit in protest
shortly when the new emergency laws were put into effect which led Rajapaksa to revoke the
law. One of those who quit was the Sports Minister Namal Rajapaksa as well as another one of
the members of the Rajapaksa family, as well as the nephew of the president.

In the face of growing political turmoil and no solution to be found, Rajapaksa’s opponents have
begun calling for a “no-confidence” vote to overturn his administration.

“We believe there are enough numbers in place and we’ll bring an amendment at the proper
moment,” opposition lawmaker Harsha de Silva spoke to CNBC. In an effort to please critics,
president Rajapaksa attempted to form an alliance under his direction but was unable to win the
support of his supporters. On April 1, the administration announced that it would suspend
temporarily the payment of the foreign debt which was the first time Sri Lanka had defaulted on
foreign loans since independence.

Experts had warned about a possible crisis regarding the nation’s finances for a while. After the
country’s default and the government was in talks about a bailout plan in conjunction with the
International Monetary Fund, which had evaluated the debt as insolvent.

“The government plans to continue its talks with the IMF as quickly as is possible in the hopes
of developing and presenting to nation’s creditors a comprehensive strategy to bring the
country’s public debt to a sustainable level,” the Finance Ministry stated in an announcement.

In a cabinet meeting with officials the following week in the same week, The president
acknowledged the role his government played in the country’s economic decline. In particular,
the president stated that the government ought to have sought out the IMF earlier for help in
tackling the country’s insolvent foreign debt and they should have stayed clear of an import ban
on chemical fertilizers. This was intended to protect the country’s foreign exchange reserves but
actually hurt the country’s agriculture production.

“During the past two-and-a-half decades, we have faced many difficulties. The Covid-19
epidemic, along with the burden of debt and our own mistakes,” Rajapaksa said.

Today, Sri Lanka’s fate is dependent on whether the president’s suggested changes to the
government will be able to pacify his increasingly hostile opposition for long enough to allow a
solution to be offered by the IMF. In the meantime, Sri Lankan central bank chief, Nandalal
Weerasinghe, has said that the desired agreement could take months to reach, however.

Watch Video – Gravitas Plus | Explained: Sri Lankan economic crisis