A Season of Trouble : Sri Lanka’s Ongoing Economics Disaster

Arka Chakraborty - Inequalities Team

On March 2, the Sri Lanka government declared a daily power cut of seven and a half hours which will be implemented across the country on a rolling basis. Two weeks later, on March 20th two men collapsed and died while waiting in separate queues to secure fuel in Colombo. The South Asian island nation of 22 million is experiencing its worst economic upheaval in a decade. From an ill-advised fertilizer ban that resulted in a dramatic drop in crop yields such as rice and tea, to its failure to deal with a foreign-currency crisis, is Sri Lanka on its way to a massive economic and humanitarian disaster? Or is it already there?

Just within the last week, massive protests have roiled the cities of Colombo, Kandy, Gale, and Anuradhapura, with thousands calling for the president's resignation. News of people collapsing, and even death, while waiting in long lines, soaring prices of basic necessities like rice, beans, bread, milk powder, and medicines have angered the already suffering population of the Island, which has remained in some form of socio-economic or political turmoil for the past couple years.

Fuel and Power Crisis in Sri Lanka: The Latest Symptoms of an Economic Disaster

This has been deemed as the longest power cut in 26 years, with the previous one having taken place in 1996 when Sri Lanka depended largely on hydropower and the reservoirs ran dry. This, on the other hand, is not a sudden crisis; it has been building for some time. The Public Utilities Commission announced a four-hour and forty-minute power outage in late February. A fuel crisis is escalating in tandem with the worsening of the energy crisis. The Ceylon Petroleum Corporation stated that it had run out of funds to purchase supplies as pumps across the island-nation began to run dry and long lines for such fuels became commonplace. It had already suffered losses of $415 million by 2021 as a result of selling fuel at prices set by the government. Even though the government had initially decided not to raise fuel prices, eventually one of the premier oil suppliers of Sri Lanka, Lanka IOC, increased the prices of diesel by up to 12 percent and of petrol by 11 percent. Both of these crises, however, are the result of the foreign exchange crisis the island-nation has been suffering from for the last few years.

(Women stand in long lines to fill their LPG cylinders after the shortage LPG and other forms of economic hardships, picture by Al-Jazeera)

The foreign exchange crisis which has brought the country on the verge of bankruptcy is the result of a series of problems which sometimes overlap with one another. Sri Lanka’s tourism sector, on which depends 10% of the state’s Gross Domestic Product, was damaged tremendously due to the attack of suicide bombers on three churches and three luxury hotels in Colombo on 21st April, 2019. Tourism dropped by 70% and failed to recover due to the outbreak of the Covid-19 pandemic. The third wave in particular hit the country hard, which led to export trade being interrupted as most of its clients were also badly affected by the pandemic. Factories of garments, which are major foreign exchange earners, also had to be closed temporarily. To this can be added the Sri Lankan President Gotabaya Rajapaksa’s sudden and rushed decision to ban all non-organic products’ use in the agriculture sector. While this was done with the aim of turning Sri Lanka into a model for all other countries towards the direction of organic farming, the rushed and essentially unplanned execution of the vision spelled doom for its agricultural sector which is the backbone of its economy. The production of tea, which is seen as the country’s major commercial crop, is estimated to be halved as an immediate result of this move, according to one of the country’s leading tea experts Hermann Gunaratne. Moreover, the tea produced will also lose its value in foreign markets as organic tea is nearly ten times more costly than that produced with non-organic aid. The production of crops like cardamom, cinnamon, pepper, rice are also being negatively affected by the sudden move to organic farming and all this is significantly contributing to the foreign exchange crisis that is crippling the island-nation today. In 2019, the Rajapaksa government also decided to nearly halve the value-added tax to boost spending, which has also contributed to the country’s present financial situation. On top of all this, the ongoing Russia-Ukraine war is sure to make the country’s situation worse as both the warring states are importers of Sri Lankan tea and both are sources of tourists who travel to Sri Lanka. Apart from the foreign exchange crisis, the mounting debt crisis that Sri Lanka is now facing is also the result of unwise decisions regarding infrastructure as some of the infrastructure projects he authorities financed by taking large amounts of loans from China turned out to be white elephants.

(Long lines in front of patrol pumps and gas stations, with men holding large bottles and cans, to buy Kerosine and other forms of fuel, Picture by Al-Jazeera)

The connection between the foreign exchange crisis and the current fuel and power crises lies in the fact that Sri Lanka mainly depends on imports for its fuel and the energy sector heavily depends on imported oil. The Ceylon Electricity Board by late February reported that the fuel shortage had already led to a halt in the functioning of three thermal power stations.

February 2022, and So On

All these factors combined have created a situation so dire that in February the government scrambled to pay for two shipments of imported fuel as the foreign exchange reserves have dropped dramatically. By January, 2022, the reserves had dropped to $ 2.36 billion. This puts the country in a precarious position internationally as it has to pay around $ 7 billion in debt this year, including a $1 billion bond due this July, failing which it might have to turn to the International Monetary Fund for aid, which the government has so far been wishing to avoid. The direness of the situation is hammered home by the fact that Sri Lanka needs $500 million a month to source petrol and diesel to keep the country going. Apart from the devastating effects of the foreign exchange crisis mentioned above, the president of the Lanka Private Bus Owners Association Gemunu Wijeratne has already warned of a collapse of public transport if petrol is not provided, even as buses are starting to disappear from the streets due to paucity of fuel. Three international agencies have downgraded Sri Lanka since late 2021 due to the assumption that the country may not be able to service its $35 billion sovereign debt. Inflation has also made the life of the commoners worse as the country in February 2022 experienced an overall inflation of 16.8 percent and a food inflation of 25 percent. The prolonged power cuts have put the country’s malls, shops and restaurants under enormous pressure. The All Ceylon Container Carrier Owners’ Association informed that 20% of all contained carriers had to be taken out of service. As the government is now imposing broad import restrictions across the country to save dollars, the general public’s lives are getting worse as essentials like milk powder, pulses and spices sourced from outside the country are soon to disappear from the markets. Alarmingly, the Sri Lanka Chamber of the Pharmaceutical Industry (SLCPI) has informed that it foresees a 20-25% shortage in medicines due to price regulations, a delay in granting import licenses and the persistence of the dollar shortage.

Apart from import restrictions, Sri Lanka is relying on credit lines and currency swaps to alleviate its current economic crisis, depending on countries like India, China and Bangladesh. In January 2022, India signed a credit swap of $400 million with Sri Lanka. In February, India extended a line of credit of $500 million to help Sri Lanka buy petroleum products. When a $500 million loan deferment is added, India’s total support to Sri Lanka amounts to 1.4 billion dollars so far. A further $1 billion support from India was negotiated and finalized with Sri Lanka’s Finance Minister Mr. Basil Rajapaksa’s visit to India on 16th March 2022. The two nations have already agreed on a four-pronged plan to support the island-nation’s economy, including currency swaps and lines of credit.

(Sri Lankan Finance Minister on his India tour in March 2022. He met with PM Modi to negotiate a one billion USD credit line, picture by India Today)

The Sri Lankan government’s flawed economic policies have, in addition to the unforeseen disasters caused by the Easter bombings and the Covid-19 pandemic, been responsible for the crisis the island-nation is facing today. However, the Rajapaksa regime has so far been seen shifting the blame on others and carrying on with its reckless policies. In September, 2021, it blamed the speculators for the hoarding of food materials and proceeded to forcibly seize food materials from traders to distribute them among the public, a move that is sure to de-incentivize the traders in bringing in fresh stocks.

Moreover, it carried on with its 100% organic food production project without paying any heed to all the warning signs. Lately, the regime has sacked Minister of Energy Udaya Gammanpila and Minister of Industries Wimar Weerawansa for criticizing the government’s response to the foreign exchange crisis.

March 14 and Beyond:

On March 16, President Rajapaksa in his address to the nation said “This crisis was not created by me. When those who contributed to the creation of this crisis are criticizing the government in front of the people today, I am attempting to immediately resolve this crisis and provide relief to the people… I entered into politics on your invitation. All of you have placed an utmost trust in me. ” President Gotabaya Rajapaksa's government said it will begin talks with the International Monetary Fund (IMF) for assistance next month, while Finance Minister Basil Rajapaksa flew into New Delhi to sign a $1 billion credit line to address the crisis.After months of opposition to seeking IMF assistance, Rajapaksa's government announced on March 16 that it would begin talks with the multilateral lender next month, after the cabinet authorized the finance minister to prepare proposals.

(Picture credit Al-Jazeera)

(Picture credit Al-Jazeera)

However, since the address massive protests against the government have erupted in Sri Lanka's capital, with demands for President Gotabaya Rajapaksa's resignation. Tens of thousands of people gathered outside the president's office in Colombo on Tuesday, led by supporters of the opposition party, the United People's Force. People wearing black bands on their heads, and across their bodies with “ GOTA GO HOME '' written over them. A man was pictured with bread loafs skewed on a stick angrily yelling slogans in front of the presidential office. While the people of the country are strolling across streets and shops for basic necessities, the family members of the governing leaders (the Rajapaksa brothers) are seen enjoying lavish vacations abroad. The disparity between various classes, and the politically powerful, has only angered people further.

(picture credit- Al-Jazeera)

On Tuesday, March 22, Sri Lanka dispatched troops to petrol stations in response to sporadic protests among the thousands of motorists queuing daily for scarce fuel. Authorities said soldiers were deployed after angry crowds blocked a busy street in Colombo and slowed traffic for hours on Monday because they couldn't buy kerosene oil. Shortages have disrupted almost every aspect of daily life, with authorities postponing term tests for millions of students last week due to a lack of paper and ink.

What will become of Sri Lanka's economic crises in the future? Will the public outpouring of rage force Rajapaksa to resign? Will opposition political parties put aside their differences and band together to combat the crisis? When will the troubled season end?

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