The economic crisis in Sri Lanka is getting worse. Prime Minister Ranil Wickremasinghe warned on Monday that “the next few months will be the most difficult”. However, the ongoing crisis has been going on for a few years.
Here is a 10-point overview of the economic crisis in Sri Lanka:
On Monday, Prime Minister Wickremasinghe tweeted a lengthy thread of “unpleasant” facts about Sri Lanka’s economic situation. He stated that government revenues are about 1.6 trillion SLR while spending is currently 4 trillion SLR. This means that the budget deficit is 2.4 trillion SLR, or 13% of GDP.
Foreign exchange reserves, which help a country pay for imports, are almost empty. “Finding $1 million is a challenge,” the prime minister tweeted. Interestingly, he noted that the country had $7.5 billion in foreign reserves in November 2019.
Wickremesinghe added that Sri Lanka needs $75 million to pay for fuel. For now, India has extended a credit limit for diesel shipments. “We are working on getting dollars in the open market to pay for the shipments,” he tweeted.
Sri Lanka also suffers from a shortage of medicines and medical equipment. However, it is already in default on its payments. Without going into details of the possible solution, Wickremesinghe said Sri Lanka will have to pay 34 billion SLR for four months of medical supplies.
Sri Lanka’s external debt is about $50 billion, and China’s share is estimated at about $8 billion. China’s “hidden debt trap” is responsible for the worsening debt crisis as the country embarked on a series of China-funded projects that failed. On April 12, Sri Lanka’s central bank unilaterally stopped repaying its foreign debt.
Sri Lanka showed promise after the end of the 25-year civil war against the LTTE. “Recent trends such as low inflation, low and stable interest rates, strong foreign reserves, stable exchange rate and improving fiscal outlook are solid indications that the economy is returning to normal,” the central bank noted in 2010.
Sri Lanka’s economy grew 8.6% in the last quarter of 2010 and reached 9.1% growth in 2012. This was largely due to a huge boost for public infrastructure projects and the revival of tourism.
Tourism, which contributed at least 12% to GDP in 2019, became an important source of income. In 2018, the island nation welcomed 2.3 million tourists, the highest number ever.
However, the Easter bombings in 2019 and the Covid pandemic a year later devastated the tourism industry. In 2021, Sri Lanka welcomed only about 1.9 lakh tourists and earned a meager $500 million in revenue.
The ongoing Covid pandemic has only exacerbated the foreign exchange situation, with forex reserves falling by more than 70% in two years. The decision to support organic farming – critics argued it was due to a shortage of forex – led to poor agricultural yields. As a result, agriculture’s share of GDP contracted by 2.4% in 2020.