COLOMBO, Apr 1, 2022, India Today. As Sri Lanka’s worst economic crisis in decades brought more power cuts and gloom, people in the country are staring at a very bleak future. The country ran out of diesel on Thursday and the island nation of 22 million people is struggling with rolling power cuts for up to 13 hours a day as the government is unable to make payments for fuel imports because of a lack of foreign exchange, India Today reported.
Sri Lankans are now blaming the government for the worst economic crisis since its Independence in 1948.
Here are the latest developments:
1. Hundreds of protesters on Thursday night marched along dark streets and gathered outside President Gotabaya Rajapaksa’s house in capital Colombo to stage a protest. They even tried to storm his residence but were stopped by armed soldiers. The police managed to disperse the crowd using tear gas and water cannons. A curfew has now been imposed in Colombo.
2. On Wednesday, March 30, Sri Lanka began imposing record nationwide 10-hour daily power cuts, up from the seven-hour power outage announced in the first week of March, as it ran out of hydroelectricity. This soon, increased to 13 hours of total blackout as the country ran out of diesel as well.
3. India has reportedly agreed to send aid of 40,000 tonnes of diesel. This will be in addition to the USD 500 million credit line for buying fuels India offered earlier this year. Sri Lanka imports 100% of its petroleum needs.
4. India has also assured Sri Lanka that it would extend the credit line to meet the imports of essential items such as rice, wheat, wheat flour, pulses, sugar and medicines. Earlier this year, India extended a USD 400 million currency swap besides the Chinese currency swap facility amounting to $1.5 billion in 2021.
5. Retail inflation hit 18.7% in March over the same period a year ago, Reuters reported. Food inflation reached 30.2% in March, partly driven by a currency devaluation and last year’s ban on chemical fertilisers that was later reversed. Inflation was at its worst level in over a decade.
HOW THE CRISIS UNFOLDED IN SRI LANKA
The current economic crisis in Sri Lanka is a result of badly-timed tax sops, poor investments in projects, and Covid-induced restrictions.
1. In 2019, the Sri Lankan government announced several tax cuts, leading to a huge dip in revenue. This came at a time when the historically weak government finances were still looking for ways to pay off the sovereign bonds that Sri Lanka’s governments had been issuing for the past 13-14 years, without provisioning for repayment.
2. The international debts for Sri Lanka have mounted to unmanageable amounts. The nation now owes about USD 7 billion. Among its debts is a USD 1-billion international sovereign bond that matures in July. Sri Lanka’s public debt has risen (in projection) from 94 per cent of its gross domestic product (GDP) in 2019 to 119 per cent of the GDP in 2021, the International Monetary Fund (IMF) said in early March.
3. Sri Lanka’s foreign exchange reserve has fallen 70% since January 2020. This stalled its imports, leading to an acute shortage of several essential items. Its currency has undergone substantial devaluation.
4. The loan arrangements with China too contributed to the Sri Lankan economic crisis. Most of the loan it received from China in the past decade was invested in low-return projects, such as the construction of ports, airports, and coal power plants. The loan amounted to nearly USD 5 billion.
5. The final blow that led to the crisis in Sri Lanka was dealt by the Covid-19 pandemic. One of its major contributors, tourism, was severely hit during the pandemic. Taking the industry to abysmal lows. When the pandemic looked to subside and travel curbs were scrapped, tourist in-flows increased, with nearly 25% of visitors arriving from Ukraine and Russia till February, but the tourist in-flow from these countries stopped. Its traditional tourist sources, India, China, the UK and Germany, have not recovered to pre-Covid levels.