Why Sri-Lanka’s Economy Collapsed?

In current times, Sri Lanka has been getting financial assistance from neighboring countries like India who has supported the needful by approximately $4 billion in credit lines, collapsed due to many reasons..

July 19, 2022

Sri Lanka Economy collapsed due to many reasons,
Colombo, Sri Lanka’s prime minister, says the island nation’s debt-laden economy has collapsed as it runs out of money to pay for food and fuel. Short of cash to pay for imports of such necessities and already defaulting on its debt, it is seeking help from neighboring countries like China and India from the International Monetary Fund. 

The current prime minister Ranil Wickremesinghe, who took the command of the country in may, emphasized the monumental tasks he faced in turning around an economy he said is heading for “rock bottom”. Sri Lankans are skipping meals as they endure shortages, lining up for hours to try to buy scarce fuel. It’s definitely a harsh reality for a country whose economy had been growing exponentially, with a growing and comfortable middle class, until the last crisis deepened. 

How Serious is Sri Lanka Economy Crisis? 

The government owed $51 billion and is unable to make interest payments on its loans, let alone put a dent in the amount borrowed. Tourism, a crucial engine of economic growth, has stumbled because of the pandemic and concerns about safety after terror attacks in 2019. And Sri Lanka economy has collapsed by 80%, resulting in the imports getting more expensive and worsening inflation that is already out of control, with food costs rising to 57%, according to the official data. The outcome is a country hurtling towards bankruptcy, with hardly any money to import gasoline, milk, cooking gas and even toilet paper. Political corruption is also a major concern; not only did it contribute to the country frittering away its wealth,but it also complicates any financial rescue for Sri Lanka. 

 

How is Sri Lanka Economy Crisis Affecting People?

 

Tropical Sri Lanka normally is not lacking for food but people are going hungry. The U.N World Food Program says nearly nine of 10 families are skipping meals or otherwise skimping to stretch out their food, while 3 million are receiving emergency humanitarian help. 

Doctors have resorted to social media to try to get critical supplies of equipment and medicine. Growing numbers of Sri Lankans are seeking passports to go overseas in search of work. Government workers have been given an extra day off from work for three months to allow them time to grow their own food. To sum up things, people are suffering and desperate for things to improve. 

 

Why is Sri Lanka Economy in Such Dire Traits?

 

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

Much of the public’s indignation has focused on President Gotaaya Rajapaksa and his brother, former Prime Minister Mahinda Rajapaksa. The latter resigned after weeks of antigovernmental protests that eventually turned violent. 

The government needed to boost its revenues as foreign debt for big infrastructure projects soared, but instead Rajapaksa pushed through the largest tax cuts in Sri Lankan history. Creditors downgraded Sri Lanka’s ratings, blocking it from borrowing more money as its foreign reserves sank. Then tourism flatlined again during the pandemic.

In April 2021, Rajapaksa suddenly banned imports of chemical fertilizers. The push for organic farming caught farmers by surprise and decimated staple rice crops, driving prices higher. To save on foreign exchange, imports of other items deemed to be luxurious also were banned. 

 

Why Did The Prime Minister Say that Sri Lanka Economy Collapsed?

 

Such a stark declaration might undermine any confidence in the state of the economy and it didn’t reflect any specific new development. Wickremesinghe appeared to be underscoring the challenges his government faces in turning things around as it seeks help from the IMF and confronts criticism over the lack of improvement since he took office a few weeks ago. He’s also fending off criticism from within the country. His comment might be intended to try to buy more time and support as he tries to get Sri Lanka economy back on track. The Finance Ministry says Sri Lankas has only $25 million in usable foreign reserves. That has left it without the wherewithal to pay for imports, let alone repay billions in debt. 

In current times, Sri Lanka has been getting financial assistance from neighboring countries like India who has supported the needful by approximately $4 billion in credit lines.

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