EXPLANATION: Why Sri Lanka’s Economy Collapsed And Now What?

COLOMBO, Sri Lanka (AP) – Sri Lanka’s prime minister said late last month that the island’s debt-laden economy had “collapsed.” because the money is running out to pay for food and fuel. It has no cash to pay for imports of such supplies and has already defaulted on its debt, seeking help from neighboring India and China as well as the International Monetary Fund.

Prime Minister Ranil Wickremesinghe, who took office in May, emphasized the monumental task he faced in reversing an economy that he said was headed for a “bottom.” On Saturday, both he and President Gotabaya Rajapaksa agreed to resign amid mounting pressure from protesters who stormed both homes and set one of them on fire.

Sri Lankans skip meals as they face shortages and queue for hours to buy scarce fuel. It is a harsh reality for a country whose economy was growing rapidly, with a growing and comfortable middle classuntil the last crisis deepened.


The government owes $51 billion and cannot pay interest on its loans, let alone put a dent in the amount borrowed. Tourism, a key driver of economic growth, has been sputtered by the pandemic and security concerns following the 2019 terror attacks. And the currency has collapsed by 80%, making imports more expensive and exacerbating inflation that has already spiraled out of control with food. costs increase by 57%, according to official data.

The result is a country headed for bankruptcy, with barely any money to import gasoline, milk, cooking gas and toilet paper.

Political corruption is also a problem; not only did it play a part in squandering its wealth, but it also hampered any financial rescue for Sri Lanka.

Anit Mukherjee, a policy officer and economist at the Center for Global Development in Washington, said any aid from the IMF or World Bank should be subject to strict conditions to ensure aid is not mismanaged.

Still, Mukherjee noted that Sri Lanka is on one of the world’s busiest shipping routes, so letting a country of such strategic importance collapse is not an option.


In tropical Sri Lanka there is normally no shortage of food, but the people are starving. The UN’s World Food Program says nearly nine out of 10 families skip meals or otherwise skimp on stretching their food, while 3 million receive emergency humanitarian aid.

Doctors have resorted to social media to try to get critical supplies of equipment and medicines. A growing number of Sri Lankans are seeking passports to go abroad in search of work. Government workers have been given an extra three months off to give them time to grow their own food.

In short, people are suffering and desperate for improvement.


Economists say the crisis stems from domestic factors such as years of mismanagement and corruption.

Much of the public’s anger has been directed at President Rajapaksa and his brother, former Prime Minister Mahinda Rajapaksa. The latter resigned in May after weeks of anti-government protests that eventually turned violent.

Conditions have worsened in recent years. Suicide bombings in churches at Easter in 2019 and hotels have killed more than 260 people. That devastated tourism, a major source of foreign exchange.

The government had to increase its revenues as external debt for major infrastructure projects soared, but instead Rajapaksa has implemented the largest tax cuts in Sri Lankan history. The tax cuts were recently reversed, but only after creditors downgraded Sri Lanka’s credit rating, which prevented the country from borrowing as foreign reserves fell. Then tourism came to a standstill again during the pandemic.

In April 2021, Rajapaksa suddenly banned fertilizer imports. The push for organic farming surprised farmers and decimated key rice crops, driving prices higher. In order to save on foreign exchange, the import of other items considered luxury was also banned. Meanwhile, the war in Ukraine has pushed up food and oil prices. Inflation was close to 40% and food prices rose by almost 60% in May.


Wickremesinghe’s grim statement in June, who is in his sixth term as prime minister, threatened to undermine confidence in the economic situation and did not reflect any specific new development. The prime minister appeared to underline the challenges his government faces as it seeks help from the IMF and has been criticized for the lack of improvement since he took office weeks earlier. The comment may have been intended to try and buy more time and support as he tries to get the economy back on track.

The Treasury Department said Sri Lanka had only $25 million in usable foreign reserves. As a result, the country has no means to pay for its imports, let alone repay billions in debt.

Meanwhile, the Sri Lankan rupee has fallen in value to about 360 to the US dollar. That makes the import costs even more unaffordable. Sri Lanka has suspended repayment of about $7 billion in foreign loans owed this year from the $25 billion due in 2026.


So far, Sri Lanka has been muddling through, supported mainly by $4 billion in credit lines from India. An Indian delegation came to the capital Colombo in June to discuss more aidbut Wickremesinghe warned against expecting India to keep Sri Lanka afloat for a long time.

“Sri Lanka’s last hope is in the IMF,” read a June headline in the Colombo Times. The government is negotiating a rescue plan with the IMF and Wickremesinghe has said he expects a tentative deal later this summer.

Sri Lanka has also sought more help from China. Other governments such as the US, Japan and Australia have provided several hundred million dollars in aid.

Earlier in June, the United Nations launched a global public appeal For assistance. So far, projected funding barely exceeds the $6 billion the country will need over the next six months to stay afloat.

To counter the fuel shortage in Sri Lanka, Wickremesinghe told The Associated Press in a recent interview that he would consider buying discounted oil from Russia.

Kurtenbach, AP’s Asia business editor, contributed from Bangkok.

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