Sri Lanka is Going Down the Dumpster

For over a month now, Sri Lankans have been taking to the streets to demand the resignation of President Gotabaya Rajapaksa and his brother, Prime Minister Mahinda Rajapaksa.  The island nation is facing its worst economic crisis since gaining independence from Britain in 1948 - with food shortages, soaring prices and power cuts. The government is now requesting emergency financial help.

And now the protests have partially paid off-- Sri Lanka's Prime Minister Mahinda Rajapaksa has finally resigned.  Rajapaksa sent his resignation letter to his younger brother President Gotabaya Rajapaksa.  The move came as the island was placed under curfew after violent clashes between Rajapksa supporters and anti-government protesters in Colombo.

 Protests flared up in early April in the capital, Colombo. These have grown massively in size and have spread across the country.  People are furious because the cost of living has become unaffordable.  They are paying up to 30% more for food than a year ago. This has forced many people to skip meals.

There are also fuel shortages, and a lack of medicines has brought the health system to the verge of collapse.  There was outrage following one demonstration in which police fired live ammunition, killing a protester.

Nearly all the ministers in President Rajapaksa's government have resigned and several MP's have withdrawn their support for the government.  However, the president says he has no intention of stepping down.

Sri Lanka's problems come down to the fact that its foreign currency reserves have virtually run dry.  The country is heavily reliant on imports, but can no longer afford to pay for staple foods and fuel.  The government blames the Covid pandemic, which all but killed off Sri Lanka's tourist trade - one of its biggest foreign currency earners.  It also says tourists were frightened off by a series of deadly bomb attacks on churches three years ago.  However, many experts say economic mismanagement is to blame.

At the end of its 30-year civil war in 2009, Sri Lanka chose to focus more on its domestic markets instead of selling to foreign ones. So income from exports remained low, while the bill for imports kept growing.  Nowadays, Sri Lanka imports $3bn (£2.3bn) more than it exports every year.  The government also racked up huge debts with countries like China, to fund what critics have called unnecessary infrastructure projects. 

Several other dubious policies have also been blamed for worsening the situation.  When he came to power in 2019, President Rajapaksa decided to offer big tax cuts. This means the government now has less money to buy foreign currency.  Rajapaksa and his new finance minister Ali Sabry now admit the tax cuts were a "mistake".  When Sri Lanka's currency shortages became a really big problem in early 2021, the government tried to stop the outflow of foreign currency by banning all imports of chemical fertilizer, telling farmers to use organic fertilizers instead.  This led to widespread crop failures. Sri Lanka had to supplement its food stocks from abroad, which made its foreign currency shortage even worse.

Since then, the government has banned the import of a wide range of "non-essential" items - from cars to certain types of food and even shoes.  One way that countries can boost their exports is to cut the value of the currency, but the government refused to let the Sri Lankan rupee fall against other currencies.  It finally did so in March 2022, and the rupee fell more than 30% against the dollar.  Sri Lanka's government has also racked up $51B in foreign debt.  This year, it will be required to pay $7B to service these debts, with similar amounts for years to come.  In April, the Sri Lankan government failed to make repayments totaling $78m. Credit rating agency S&P called this a "selective default".  It was the first time Sri Lanka had defaulted on its foreign debts since independence. 

The government is seeking a bail-out from the International Monetary Fund (IMF).  However, the IMF has said the government must raise interest rates and taxes as a condition for a loan, which would make the country's cost of living crisis worse.  Sri Lanka also owes $6.5bn to China and the two are in talks on how to restructure the debt.  China earlier agreed to bolster Sri Lanka's foreign currency reserves by swapping the Lankan rupee for its currency, the renminbi. Since then, it has signaled its displeasure over Colombo approaching the IMF for help.