Sri Lanka’s Devastating Economic Crisis

On June 21, tuk-tuks, motorbikes, cars, and buses lined up at a fuel station on the edge of Colombo’s Kurunduwatta, a neighborhood of tree-lined streets and old mansions. While the tuk-tuk drivers chatted with each other as they stood around near their three-wheelers, motorcyclists doom-scrolled on their phones, flies and mosquitoes buzzing around them in the scorching heat. They had all taken time out of their jobs and daily responsibilities to wait for hours—even days—to fill their tanks.

“We managed to survive the pandemic, but this is worse,” said Sarath Nanayyakara, a 61-year-old private school bus driver, who has been forced to sell valuables and take out loans to survive over the past couple of years. “If I work for two days, I have to stay in the queue for two more days to fill up the tank.”

“Out of my monthly salary of 50,000 rupees [$140], I currently spend 30,000 rupees on fuel,” said Morgan Anusha, a 28-year-old accountant who relies on her motorbike to get to work each day. Ruwan Chaminda, a 50-year-old tuk-tuk driver, also spends most of his earnings on gas. “I have two children, and one is still in school, so I have to support her,” he said as a nearby shop provided free coffee to those in line. “This is the only job I have done for 20 years, so I have to roll with it.”

The country’s fuel supply has been limited since May, but in recent weeks, the shortage has escalated into a full-blown crisis. On June 27, the government announced that the country had little fuel left, and it reserved supplies for essential services such as public transit and the health sector, restricting it for all others. Schools have been shut. Interprovincial bus services are limited. Many people have been asked to work remotely. The country has come to a standstill until the next gasoline shipment arrives on July 22. As Vagisha Gunasekara, an economist at the United Nations Development Program in Sri Lanka, put it, “the fuel crisis has paralyzed the economy.”

The fuel shortages are just one part of an economic crisis that has upended daily life in the country. For months, Sri Lankans have faced shortages of fuel, gas, and medicine, as well as skyrocketing inflation—now around 55 percent—that has drastically increased the cost of living. In response, people around the country have been protesting since April. On July 9, they stormed into and occupied the official residences and offices of both President Gotabaya Rajapaksa and Prime Minister Ranil Wickremesinghe, causing both to announce their intentions to resign.

At this point, only Rajapaksa, who has fled the country, has resigned, and he has appointed Wickremasinghe as acting president. As demonstrators continue to protest Wickremasinghe and wait for Parliament to elect a new president, which it is set to do on July 20, the country’s political and economic future—and the livelihoods of everyday Sri Lankans—hang in the balance.

While the Rajapaksa administration contributed to Sri Lanka’s plight, the crisis has been decades in the making.

Sri Lanka has long run a current account deficit. Although the country established an apparel sector in the 1980s, Gunasekara pointed out, it has generally failed to diversify its exports, which are largely limited to colonial-era commodities such as tea, rubber, and coconut. At the same time, Sri Lanka is overly dependent on imports for essential goods and for its exporting industries—even tea bags have to be imported into the country for its tea industry.

While state expenditure has increased over the years, tax revenue proportionate to GDP has declined since the 1990s as the government has failed to implement progressive tax policies, leading to a budget deficit. Experts point to close relationships among businesspeople, politicians, and bureaucrats, creating a class of officials unwilling to tax their political allies.

The country also has an external debt problem, which has worsened over the past dozen years. Its foreign debt obligations currently total around $50 billion, up from $22 billion in 2010.

When Rajapaksa took over in 2019, he made a series of tax cuts for populist reasons, worsening the budget deficit. The following year, the COVID-19 pandemic hit Sri Lanka’s tourism industry—a bulwark of the national economy—and credit rating agencies took note. In 2020, Sri Lanka lost access to international markets. The government then refused to restructure its debt, and it used money from reserves to pay the debt. By this March, the government had no backup plan and no dollars to import essentials.

In May, Sri Lanka defaulted on its debt. The International Monetary Fund held discussions in Colombo in June—and it discussed several reforms with the government, including anti-corruption measures, in advance of potential support—but nothing has come yet of the talks.

Until last month, Sri Lanka relied on an Indian credit line for fuel, but that has since ended. “We are at a point where we are no longer able to get those letters of credit [to import essential goods],” said Chayu Damsinghe, the product head of macroeconomic research at Frontier Research. “No one is going to give us anything on credit because there is no confidence that Sri Lanka will be able to pay back.”

The economic crisis has devastated people’s lives and livelihoods. Aside from long lines for fuel, cooking gas, and kerosene oil, there are major shortages of essential goods. Each day, there are hour long disruptions to electricity across the island.

Prices of basic food staples such as rice and fish have skyrocketed. The price of vegetables has more than doubled. In 2021, Rajapaksa banned chemical fertilizers in a bid to move Sri Lanka entirely to organic farming. The ban resulted in a sharp decline in crop yields. Since then, farmers have had to pay for chemical fertilizer, which was formerly free, and the number of active farmers has decreased. While the policy has been abandoned, the farming system has yet to recover.

Sri Lanka’s health sector, which had already been hit by the pandemic, has also suffered. There are medicine shortages, particularly for heart, stroke, and cancer patients. In certain hospitals, routine operations are on hold and only emergency operations have been permitted. Some cancer doctors have had to appeal for overseas donations in order to procure medication necessary for treatment. Many patients have been forced to source previously free medicine from private pharmacies at exorbitant prices.

There are also major barriers to education. Schools have been closed as students and teachers have been unable to access public or private transportation because of the recent fuel shortages. Universities have suspended in-person lectures, and online lectures face routine disruptions from daily electricity cuts and problems with internet service providers.

In addition, companies are likely to close, said Murtaza Jafferjee, CEO of JB Securities and chair of the Advocata Institute. There are unprecedented lines at passport centers as people have applied for jobs outside of the country or are seeking to emigrate, and Jafferjee expects a brain drain in the IT and hospitality sectors in particular.

These conditions pushed Sri Lankans to the brink on July 9, when people from across the country biked, carpooled, or piled on trains to Colombo. One protester, a 50-year-old researcher who asked to remain anonymous, had jumped into a truck full of people from Kalutara. In Colombo, he joined the crowd storming the president’s house, facing tear gas and live ammunition from security forces until the people finally broke in.

“I have children—they have no food or future. We have started to eat only two meals a day,” he told me on July 9, with tears in his eyes. The president’s house had numerous luxuries that many people had never seen. “They had ACs in every room, even in the toilet,” he said. “They had luxury bedsheets, a kitchen packed full of food, a special section for pedigree dogs, and a pool.”

Protests are ongoing, and as acting president, Wickremasinghe has called for a curfew and a state of emergency to control them. Yet pressure for him to resign continues on the streets and from inside Parliament.

Sri Lankans have largely given up hope that Wickremasinghe can address the economic crisis. According to Ahilan Kadirgamar, a political economist at the University of Jaffna, Wickremasinghe has a penchant for proposing international conferences to solve Sri Lanka’s problems that have consistently failed. As finance minister—a role he has held alongside prime minister in recent months—Wickremasinghe’s plans for the economy have included an IMF credit facility, an IMF program to stabilize the economy, and a credit aid conference with India, China, and Japan.

Although it’s unclear what will become of these plans amid the current unrest, Kadirgamar thinks there is a real risk Wickremasinghe will continue to call the shots. “There is a danger of a political coup by Ranil Wickremasinghe,” he said. “He could cut a deal with the [Sri Lanka Podujana Peramuna party], who hold the majority in Parliament, and the Rajapaksas, who need his protection, to make himself president.”

Kadirgamar believes the country needs to first achieve political stability before its economic future can be determined. Only once elections have been held and the people have provided a fresh mandate, he said, should IMF discussions be resumed. If that does not happen, “protests are likely to continue.”

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