The Sri Lankan Economic, Humanitarian-to-be, Crisis

On July 10, 2022, the world woke up to news and pictures posted on different social media and news-media platforms of Sri Lankan protestors wearing helmets and waving Sri Lankan flags breaking into the president’s and the Prime Minister’s luxury residents; cooling off in the swimming pools, and wandering in the kitchens and meeting rooms.

The crowds were furious; to the extent, that military personnel and police forces were unable to hold back the crowd. They were chanting slogans asking the president, and his Prime Minister, to step down after leaving their country bankrupt and in the middle of an economic crisis that might put thousands to death. And although President Rajapaksa is expected to resign on Wednesday, July 13, and his Prime Minister, Ranil Wickremesinghe, would follow him on Saturday, July 16, protestors confirmed not leaving either resident until both leaders officially vacant their roles and hand over their duties to the interim government.

In fact, Sri Lankan protestors are not exaggerating in their frustration; as it is the worst economic crisis in Sri Lankan history since independence in 1948. Besides, their protests have not just started out of a sudden. On the contrary, their protests have been escalating since March 2022, and with the situation getting worse, they were left with no other option than to analyze the situation; accuse the government of economic mismanagement; and ask the government to resign.

The crisis is leading the Sri Lankan island to a real humanitarian catastrophe; whereas its foreign debt amounts to $51 billion, and the country is unable to pay its debts. $6.5bn of that amount is owed to China, and for the first time in Sri Lankan history, the country defaulted on its debts to China last May. Besides, the country is obliged to repay around $28bn of its total debt by the end of 2027, which would make the country live in further economic hardships for the next few years.

Moreover, Sri Lanka is suffering from a foreign currency reserves shortage, which makes it more difficult to export food and medicine supplies, or even fuel, from other countries. According to statistics, Sri Lanka imports at least $3bn every year more than what it exports. With already having an imbalance, by the end of 2019, Sri Lankan foreign currency reserves were around $7.6bn, which fell down – almost 70%-to $1.93bn in two years.

Not only that, the situation is expected to get worse. In June, Soaring inflation was around 54.6% and is expected to reach 70% in the coming months. And with the government’s decision to print more money to help people get paid to be able to buy their daily essentials, the government is believed to have taken one of its worst decisions; whereas the Inflation rate, which was around 30%, is expected to get higher to reach 40% in the next couple of months, with food prices almost doubled.

Now that the country is seeking help from the IMF and other countries, such as China, India, and Japan, the government denied the existence of any crisis until April. On 30 August, President Gotabaya Rajapaksa announced “strict controls on the supply of essential goods”. That was when the Shelves at government-run supermarkets were already running low, and Sri Lankan people were not able to find powdered milk, rice or lentil to feed their families. Yet, the government’s rationale was that this shortage was artificial to control inflation rates, and the finance ministry assured the government’s ability to provide people with the needed goods whenever needed.

Yet, when the government announced bankruptcy, and when petrol queues got long; food and medicine supplies were not found; schools have been suspended, and electricity has been shut-down, the crisis was official.

This was after Sri Lanka was believed to be doing “economically” well; in 2019, it was upgraded to an upper middle-income country by the World Bank; and in 2016, its debt burden was only 39% of the country’s GNI compared to 69% in 2019.

Tracing the roots of that economic crisis could take us back to the end of the Sri Lankan civil war in 2009 when the government back then decided to focus more on supporting the domestic market and feeding it with more goods and products than on breaking into foreign markets overseas. This definitely led to the “bill for imports” increasing over the years, while not trying to increase the country’s foreign currency reserves.

There were also accusations for China that it has been practicing its “debt-trap” diplomacy on Sri Lanka with “unnecessary infrastructure projects”, such as building the Hambantota International Port that would serve China in the long run. However, the “debt-trap” theory is another invalid conspiracy theory in the Sri Lankan case; as the talks started from the Sri Lankan side to build the port, not from Beijing.

There are also beliefs that the pandemic, along with the 2019 Easter bombings on Hotels and Churches in Sri Lanka, has contributed to this crisis; where Sri Lanka lost its share in tourism, which led to a further fall in its foreign currency reserves, which was around $4bn on a yearly basis. And with the current economic situation and civil unrest, the UK, New Zealand, and Canada, last March, warned their citizens to visit the Asian Island. And what made things worse in the Tourism sector was the Russian-Ukrainian war; especially since most of the travelers to Sri Lanka were from both countries. And despite the talks between Sri Lanka and Russia to strengthen their bilateral relations, after Sri Lanka asked Putin for help to import fuel, the Russian-Ukrainian war would still continue harming Sri Lanka’s economy; due to Russia’s blockade of “Ukrainian grains exportation” from other countries, including Sri Lanka.

These external factors are not the only reasons for the current economic crisis. In fact, the government has been accused of corruption and economic mismanagement. This is due to the 2019 tax cuts that were cheered by many corporates; making the government lose at least $1.4bn of its income per year.

Besides, as a country living on domestic agricultural products, the country made another uncalculated decision of cutting-off fertilizers and pesticide exportation in early 2021, in an attempt to save its foreign currency reserves. However, researchers like Prof Sabine Zikeli at the Centre for Organic Farming at the University of Hohenheim in Germany, have warned that suddenly going organic would harm the soil; leading to less production and threatening the country’s food security. This also hurt tea and rubber exports. Statistics show that Tea accounts for 10% of the country’s export income, yet due to soil damage, almost 50% of Tea production was lost.

Now with the crisis at its peak, and with a new government expected to hold power in the coming few weeks, or maybe months, how the negotiations with the IMF, foreign creditors, and the neighboring countries are left unclear. However, rapid solutions and relief packages should be on the scene soon, or else, the country would face not only an economic crisis and civil unrest but a real humanitarian crisis, which would leave children with malnutrition and thousands dead.