The Economic failure of Sri Lanka – a worsening Crisis that threatens the most vulnerable of its residents

On June 28, Sri Lanka announced a halt on fuel sales for all non-essential services until July 10, making it the first country to do so since the 1970’s oil crisis. The desperate move represents just one of the numerous impacts of country’s worst economic crisis in 70 years, and it is the most impoverished of its 22 million residents that suffer the effects of its financial downfall.

The breakdown of the “Engine of Growth”

With its economy hit hard by the pandemic, Sri Lanka’s foreign currency reserves are at an all-time low. As of June 2022, the nation’s reserves have dropped to $1.93bn, compared to $7.6bn in 2019, with just $50m of which being usable.

The Sri Lanka government blames this extreme deficit on the nation’s failing tourist industry, which, often referred to as its “Engine of Growth”, once made up one tenth of the country’s total GDP. Tourist numbers on the South Asian Island began to falter in 2019 when a series of horrific bomb attacks in Colombo resulted in the deaths of over 250 people, 46 of which being foreign nationals. Making international headlines, the attacks tainted the security Sri Lanka’s tourist trade, and with the pandemic bringing international travel to a standstill less than a year later, it was unable to recover. In 2020, the country lost 50% of its tourism revenue, and the contribution of tourism to its GDP dropped to 0.8% compared to 5.6% in 2018.

The on-going Russia-Ukraine crisis has only added fuel to the fire. Russia was Sri Lanka’s second biggest market to its tea-exports, and Both Russia and Ukraine represented Sri Lanka’s largest tourist markets. Prior to Russia’s invasion of Ukraine in February, over a quarter of Siri Lanka’s visitors had come from the two countries, but by April visitor numbers had plummeted by 40%. The sudden absence of Sri Lanka’s biggest tourist markets exacerbated the downfall of its tourist trade, and as of June 2022, it is yet to recover.

A ticking-time bomb

In May of this year, Sri Lanka was unable to make a payment to its foreign debt for the first time in its history. Though the government attributed this failure to the tourist trade, international experts claim that financial negligence is to blame, insisting that economic problems emerged long before tourist numbers began to plunge.

Before his resignation in 2015, President Mahinda Rajapaksa had been heavily criticised by the international community for using excessive amounts of foreign currency, many of which coming from China, to fund unnecessary infrastructure projects across the country. One such project was the Hambantota International Deep Seaport, which saw Rajapaksa’s government borrowing $1.27bn from China between 2004 and 2010, only for it lose $300 million in the first six years following construction. The port’s failure was blamed on its proximity to the far larger and busier port of Colombo, and in 2017 it was acquired by a Chinese state-owned company for a period of 99 years after the loan could not be repaid. Commentaries believe that much of Sri-Lanka’s accumulated debt, which reached 119% of the country’s GDP in 2021, can be attributed of the large-scale infrastructure projects proposed by Mahinda that ended up being foreign debt traps.

It wasn’t until Mahinda’s brother Gotabaya became president in 2019 that the economic calamity in Sri Lanka began to intensify. In his first few month of presidency, Gotabaya polarised the nation when he introduced controversial tax cuts that lead to his government losing almost $1.5bn annually.

Then, in 2021, as national reserves plummeted, he prohibited imports of chemical fertiliser in an attempt to prevent dependency on foreign exports by telling farmers to opt for local organic fertilisers instead. The result was the opposite, causing such extensive crop failure that Sri Lanka had to purchase foreign food stocks to supplement its losses. The decline in tea-production alone lead to losses of over $425m, and though previously self-sufficient in rice production, the nation was forced to import rice of $450m in value.  

As of 2022, external debt in Sri Lanka has reached a massive $51 billion, $3.4bn of which is set to be paid by the end of the year.

A humanitarian catastrophe

The economic crisis Sri Lanka is much more severe than the modern financial crises seen across the developing world. It is a complete economic catastrophe, leaving its population of 22 million struggling to obtain basic necessities in a country stricken by escalating political conflict and violence.

In recent months, fuel shortages across the nation have left people queueing in lines more than 2km in a desperate attempt to buy cooking gas and fuel, and many go home with nothing. Eleven people have died so far while waiting for gasoline as a result of extreme fatigue and violence that has led to military intervention. Unable to buy gasoline, some have turned to bikes and public transport to get around, while affluent families are able to use electric cars and induction ovens instead. Most Sri Lankans can’t afford these luxuries, however, and are left stranded and without power in their homes.

On 28 June, Sri Lanka’s government suspended fuel sales to all non-essential vehicles, only allowing buses, trains and vehicles left for medical services to be filled up with fuel. This came just a few weeks after the introduction of daily power cuts across the country that left neighbourhoods without power for days and many businesses permanently shut.

The crisis extends far beyond the private sector. With parents unable to get their children to classrooms, public schools have also been shut across the country, and prolonged power cuts have left classes unable to continue online. Meanwhile, hospitals a have been left unable to function at full capacity.

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