An island nation of 22 million people, Sri Lanka was once presented as an economic success story, with an emerging middle class and one of the highest middle-income earners in South Asia. But the country is now essentially out of money and many people are living on the brink due to poor political decisions, reckless spending and economic mismanagement.
That Sri Lanka was heading for an economic crash had become increasingly apparent in recent years to analysts, who warned that the country’s balance of payments and macroeconomic trends were not aligned.
Over a period of decades, Sri Lanka had built up a bloated state sector, robust social welfare programs that exceeded the country’s resources, a large military and an extensive array of post-war construction projects. When economic growth slowed, it continued to borrow to pay.
As food and fuel run out in recent months, a burgeoning protest movement has pushed for the resignation of President Gotabaya Rajapaksa and other politicians linked to his family’s political dynasty. The situation came to a head this weekend when protesters broke into the president’s residence.
This is how this crisis has evolved:
The country will be hit by a series of economic headwinds in early 2020, including the coronavirus pandemic. Sri Lanka closed its borders to tourists for nearly a year and a half when the pandemic hit, devastating the tourism industry and depriving the nation of much-needed income.
Officials will ban fertilizers next year in hopes of turning the land into organic farming. The move steams up crops and leads to fears of food shortages. Although the misguided policy is lifted after seven months, the damage has already been done.
The central bank starts printing money on paper over the holes in its balance sheet, pushing inflation to a record high. The Treasury Secretary begs neighbors for lines of credit to buy diesel fuel and milk powder. The government rations power.
Sri Lanka is suspending payments on its international debt in April 2022, effectively leaving the small island in default as it plunges deeper into an economic crisis.
As the country begins to receive no foreign currency, supplies of food, fuel and other supplies are dwindling, prompting protesters to take to the streets. As protests intensify and demand that the family dynasty leave the government, Mr. Rajapaksa his cabinet with relatives. In May, the Prime Minister – Mr Rajapaksa’s older brother – is forced to leave.
Ranil Wickremesinghe is sworn in as prime minister and soon begins talks with the International Monetary Fund on the terms of an economic bailout.
The situation is getting more desperate. China – which has financed many of Sri Lanka’s major infrastructure projects with loans in recent years – is keeping its distance. India, a longtime patron, has already provided $4 billion in credit and loans, which Sri Lanka has burned through. Sri Lanka asks Russia’s President Vladimir V. Putin for a line of credit to buy fuel.
The government is trying to stem the demand for fuel, order workers to stay at home and introduce new rationing. Schools close to save fuel.
On Saturday, protesters take over the president’s residence in Colombo while Mr. Rajapaksa goes into hiding. The atmosphere in the capital becomes festive. The speaker of parliament says the president has agreed to step down, as has the prime minister.
The president will flee the country on Wednesday. While the nation’s leadership was uncertain, protesters surrounded the prime minister’s residence in Colombo, where they were met with tear gas. The prime minister, Ranil Wickremesinghe, is named acting president and vows to recapture government buildings overrun by protesters.
