Sri Lanka: Financial Breakdown and Emergency


Late on 1 April 2022, the President of Sri Lanka, Gotabaya Rajapaksa, declared a nationwide public emergency, which gave Security Forces immense power to deal with mass protests and anger across the nation.

The current crisis phase of Sri Lanka is often compared with the situation that existed in the early 1970s, a time when the nation was struggling hard for survival and was crippled by food scarcity across the country. It was also the beginning of the LTTE’s extremism, which soon converted into a demand for a separate homeland for Indian Tamils residing in the Jaffna sector and elsewhere in the country and blocked the nation’s natural development for almost four decades, till it ended with the death of its leader in the year 2009. 

As a result, the Government of Sri Lanka, in the post-LTTE phase, drifted away from India and keeping in view the largest interest of the country’s economy as well as strategic position in the region, tilted towards the People’s Republic of China. 

In response, Beijing, to undermine New Delhi’s influences in Sri Lanka, moved further and began deepening its relations with Ceylon, where it viewed economic interests and a clear scope for international trade and investment through that route. 

The current financial bankruptcy and the high rise in the price of daily consumer goods and foreign debt are a result of long, almost a decade long, policy which we see today in Sri Lanka from some time past. 

Especially, from 2010 the foreign debt of Ceylon increased manifold and today the repayment of those loans has become a major issue in the country and according to an estimate it reached 88% of the total GDP of the nation. In addition, the recent bad effects of the Covid-19 pandemic, which paved the way for global recession, also shattered the Sri Lankan economy internally leading to the present hardships. In 2021 the percentage of foreign debt rose to 101% in comparison to the country’s Gross Domestic Products.

Policy background

From over a decade the economic policy of Sri Lanka has been in a state of mismanagement and at the same time the amount of foreign debt increased yearly making the financial condition more vulnerable to the decaying circumstances. Especially, under the presidentship of Gotabaya Rajapaksa, who made large-scale tax cuts, resulting in decrease of Government revenue and the passing of a deficit budget. But, the policymakers, without taking necessary action, began printing extra money to which even the International Monetary Fund (IMF) had raised a red alert and suggested raising of interest rates and taxes to make the situation favourable. In this period most of the foreign currencies taken by the Government were spent on repayment of debt and as a result there was not much foreign money in the economy to import essential items pushing the inflation to double digits. 

There is a wider scarcity of daily consumer goods like rice, milk, eggs, sugar, petrol, diesel, power cuts up to 14-16 hours every day in urban areas while rural regions were devoid of any supply, which badly affected national industries and daily office work. It was caused due to wrong policies of the Government which depended mostly on imported goods and by this the country was blocked from being self-reliant in sectors of food and consumers goods. 

The overall condition of country’s economy started going deep down in the post-civil war period as the role of military generals increased along with democratic Governments, with corruption reaching high with no immediate solution in sight. The nexus of Military Generals and high ranking corrupt politicians have compelled the country to move in the way as it is today, where people who are deprived of their basic needs are protesting for change of Government and hoping for big helping hands from affluent and neighbouring countries as the last resort.

Immediate causes

Despite the faulty policy of the government in more than one decade, the immediate cause of the crisis includes the worldwide Covid-19 pandemic which originated from the Peoples’ Republic of China by the end of 2019 and soon spread in more than a hundred countries in the first quarter of 2020, paralysing the global economy and whose severe fatal effects were seen in rich and affluent/advanced countries of the world. It led to a total collapse of economic and financial activities of all the countries. 

As the main source of the Sri Lankan Government’s foreign currency is from tourism, and it remained in a static position since 2020, the rest all resources of the Government were diverted to health issues and management of Covid-19 to save the valuable lives of its citizens. As a result of this and other reasons, the country is faced today, despite the fact that both IMF and Asian Development Bank warned it about the consequences, as it is a country where its national expenditure exceeds national income and tradable goods and services are inadequate. Another reason which hit the incomes from tourist sector most, was the Easter Sunday bombings as well as ‘organic only’ policy under which farmers were told not to use chemical fertilisers in their farming and it badly affected the production of a variety of food grains.

Further way outs

Thus, in last two years, Sri Lanka, continued moving towards financial anarchy and chaos and in March 2022, it witnessed several protests by political parties and non-partisan groups against the Government in front of President’s office demanding his resignation immediately. 

Countries of the region like India, China, US and many others have come forward to assist the Island nation in this hour of dire need and in line New Delhi, earlier in January 2022, pledged a total of 2.415 billion US dollar to over come the crisis apart from the help provided under the SAARC currency swap arrangement, India has extended another 400 million dollars and also deferred Asian Clearing Union settlement of around 500 million dollars. 

On 17 March 2022, the island nation had received a credit of one billion US dollars as a lifeline from India to buy urgently needed items like food and medicine. In this state of a national health emergency, the Government of Sri Lanka has sought 2.5 billion dollars as emergency aid from China and New Delhi is apprehensive of its motives and designs which may tarnish the Indian image and bring to its door many other problems such as a refugee crisis, emergence of rebel groups in Sri Lanka, a humanitarian crisis, difficulty in international shipments of Indian cargo along with rising Chinese influence. 

As Sri Lanka’s location is strategically significant, countries of the region are conscious/alert enough and watching developments in Sri Lanka.

About the Author:

Dr. Rajkumar Singh is presently Professor and Head, Department of Political Science and Dean of Social Sciences at B.N. Mandal University, Madhepura (Bihar), India. His 19 books published in addition to 900 articles in national and international journals and daily newspapers from 25 foreign countries. 

By Dr. Rajkumar Singh