Sri Lanka is facing the worst financial crisis in the last 70 years with food prices increasing by 30% in March. As a result, since last month, thousands have taken the streets demanding President Gotabaya Rajapaksa’s resignation. The Rajapaksa family holds several top positions in government, including Prime Minister Mahinda Rajapaksa.
Inflation, foreign debt, food, and fuel shortages are the reasons behind the economic crisis that has expanded into a political one. Sri Lanka was already Asia’s highest rate of inflation because of lockdowns during COVID, but the diminished tourism industry because of Russia’s war against Ukraine has added to the problem, as per news reports.
The country has taken short-term loans from India, China and Bangladesh. In June 2021, Bangladesh loaned Sri Lanka $200m and in December it renewed the credit facility. In January 2022, it appealed to China to reschedule its debt and in February it borrowed $500m from India to buy oil. On March 18, India gave Sri Lanka a $1bn line of credit to pay for food and medicine.
Sri Lanka only had $2.31bn in its foreign exchange reserves in February, but the debt payments are of $7bn due in 2022. The International Monetary Fund has said that its public debt has hit “unsustainable levels” and foreign exchange reserves are insufficient.
Food has become unaffordable for many because of the increased price of products such as white rice (increased by 93% since 2019), Chicken (55%) and lentils (117%). The crisis has also pushed the country’s free healthcare system to the brink and prolonged blackouts have become common. Equipment such as catheters, anaesthetics, and gloves are running low and the Government Medical Officers Association, which represents over 16,000 doctors nationwide, has added that there is an acute shortage of life-saving drugs.
Some have attributed the huge increase in prices to the government’s decision last October to remove price controls (it had suppressed inflation for many years), the import bans in March 2020, a failed organic agriculture policy decision and the global price increase.
Lastly, in March, state-owned Ceylon Petroleum Corporation raised the price of a litre of petrol from 137 in 2021 to 254 rupees ($0.45 to $0.85; or from $2.04 a gallon in 2021 to $3.86). The price of diesel increased from 104 rupees a litre the year before to 176 rupees ($0.34 to $0.58; or from $1.54 a gallon in 2021 to $2.63).
President revokes state of emergency
Due to the economic crisis, numerous politicians have resigned. Members of the cabinet of ministers resigned on Monday 4 and a new finance minister Ali Sabry was appointed but resigned on Tuesday. His resignation has come some days before some crucial talks with the International Monetary Fund for a loan programme.
Calls for the president and prime minister to step down remain, although there are no signs of this going to happen.
“As a government, we are clearly saying the president will not resign under any circumstances. We will face this” said Highways Minister Johnston Fernando in parliament on Wednesday in response to criticism from the opposition and cries of “Go home Gota”.
41 MP’s have walked out of the ruling coalition. Because of this, President Gotabaya Rajapaksa has revoked a state of emergency and dissolved his Cabinet. Now he seeks to form a unity government.
The MP’s have become independent members, leaving Rajapaksa’s government with fewer than the 113 members needed to maintain a majority in the 225-member house. There has been no vote count yet, although Rajapaksa’s minority government could find decision-making more challenging.
Independent parliamentarians could continue to support government proposals, but opposition parties have urged the Rajapaksa brothers to resign.
In addition to these resignations, ex-central bank chief, Ajith Nivard Cabraal has been replaced by respected banker Nandalal Weerasinghe which represents a glimpse of hope. The monetary authority with him could return to orthodox policymaking.