Sri Lankan economic crisis 2019-2024 Impact on Economy and People

The Sri Lankan economic crisis had a profound impact on the economy and people of the country. The crisis led to a severe shortage of essential goods, including food, medicine, and fuel.

The inflation rate skyrocketed, reaching 17.5% in 2022, making it difficult for people to afford basic necessities. In 2022, the inflation rate was 17.5%.

The crisis also led to a significant decline in the value of the Sri Lankan rupee, making imports more expensive and exacerbating the shortage of essential goods. The rupee lost 80% of its value between 2019 and 2022.

The economic crisis had a devastating impact on the people of Sri Lanka, with many struggling to access basic necessities like food and medicine.

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Sri Lanka's economic crisis was caused by a combination of factors, including its income from exports remaining low while the bill for imports kept growing, resulting in a $3bn trade deficit every year.

The government's economic policies, led by Mr Rajapaksa, were also to blame for the crisis. He introduced big tax cuts in 2019, which lost the government more than $1.4bn a year in revenues.

Sri Lanka's foreign currency shortages became a serious problem in early 2021, and the government tried to tackle the issue by banning imports of chemical fertilisers, but this led to widespread crop failures.

The country's debt has been accumulating over the past few years, with Sri Lanka now owing more than $50bn to international creditors with little means of repayment.

The crisis was described by Professor Mick Moore as "the most man-made and voluntary economic crisis of which I know", due to the government's failure to acknowledge and re-structure the mounting debt earlier.

The government's insistence on repaying debts in full, despite being unable to do so, has made the situation even more dire, with Sri Lanka now facing a "very critical situation".

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The Sri Lankan economic crisis had a significant impact on the country's economy. In 2021, the government officially declared the worst economic crisis in 73 years.

Fuel shortages were a major issue, making it difficult for people to get to school and work, and long queues to get LPG gas for cooking became the norm. Power cuts were also unpredictable and frequent.

Inflation was a major concern, with a 17.5% rate as of February 2022, and a 24.7% year-on-year increase in food prices. Local red chilis saw a 60% price increase, while potatoes rose by 74.8% and Nadu rice by 64%.

The crisis also affected the country's exports, with leading textile brands like Zara, Mango, and H&M diverting their orders to India due to the worsening economic conditions in Sri Lanka.

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Inflation in Sri Lanka has seen significant fluctuations in recent years. As of February 2022, the inflation rate was a high 17.5%.

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The year-on-year increase in food prices was particularly striking, with a 24.7% rise in prices. Non-food items also saw an 11% rate of increase.

Local red chilis saw a massive 60% price hike from February 2021 to February 2022, while local potatoes increased by 74.8% and Nadu rice by 64% during the same period.

The economic crisis in Sri Lanka has led to a significant shift in the country's exports. Leading textile brands like Zara, Mango, and H&M have diverted their attention from Sri Lanka to India.

This change is largely due to the worsening economic and political conditions in Sri Lanka. As a result, India has witnessed a sharp surge in overseas orders for tea products.

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The Rajapaksa Government initially denied the existence of an economic crisis and refused to seek assistance from the IMF.

CBSL Governor Cabraal criticized rating downgrades by Moody's, calling them unwarranted, erroneous, and reckless.

By March 2022, the Government acknowledged the economic crisis but denied any responsibility.

President Gotabaya Rajapaksa blamed his critics for creating the crisis, a claim echoed by the Central Bank under Cabraal, who blamed the media, opposition, rating agencies, and the COVID-19 pandemic.

In April 2022, President Rajapaksa accepted the agricultural crisis and the refusal to seek IMF assistance early on as "mistakes".

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The Government of Sri Lanka initially denied the existence of an economic crisis and refused to seek assistance from the IMF.

This was despite rating agencies downgrading the sovereign credit rating, making it harder to take on more debt.

CBSL Governor Cabraal also criticized the rating downgrades as unwarranted, erroneous, and reckless.

The Government accepted the existence of the economic crisis by March 2022, but denied any responsibility.

President Rajapaksa blamed his critics for creating the crisis, echoing the Central Bank under Cabraal, who blamed the media, the opposition's "doomsday reports", rating agencies, and the COVID-19 pandemic for causing the crisis.

However, President Rajapaksa later accepted the agricultural crisis and the refusal to seek IMF assistance early on as "mistakes".

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The government has taken steps to address the energy crisis in Sri Lanka. The Minister of Power and Energy announced in June 2022 that companies from oil-producing countries would be allowed to import and sell fuel.

This move was made to break the duopoly held by the state-owned Ceylon Petroleum Corporation and the Indian government-owned Lanka IOC, which controlled 80% and 20% of the market respectively.

In March 2023, the government allowed three new corporations to enter the market: United Petroleum, Sinopec, and RM Parks in a collaboration with Shell. This collaboration is expected to bring in new competition and help end the energy crisis.

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The social impacts of the Sri Lankan economic crisis have been severe. Fuel shortages have made it difficult for children to get to school and for people to get to work.

Long queues to get LPG gas for cooking have become a norm, and power cuts are unpredictable and frequent. This has made everyday life extremely challenging for the people of Sri Lanka.

The cost of essential items has skyrocketed, adding to the woes of the common people.

The decline in foreign remittances had a significant impact on Sri Lanka's economy. By February 2022, the unofficial market value of the rupee exceeded 248 to the dollar, despite the government attempting to keep it pegged at Rs. 200/- to the US dollar.

Official remittances crashed with a 61% reduction in January 2022, causing Sri Lankan banks to run out of foreign currency. This was largely due to foreign workers remitting money through unofficial channels.

Cabraal threatened to freeze bank accounts of those that use unofficial money transmission methods, but this only pushed people further away from the formal banking system.

Fuel shortages in Sri Lanka have made it difficult for children to get to school and for people to get to work. The situation is exacerbated by long queues to get LPG gas for cooking, and long and unpredictable power cuts.

Prof Moore, who was in Sri Lanka six weeks ago, explains that the fuel shortages are making it incredibly difficult to get on with basic things day to day, which is making people very angry.

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Daily power cuts have been imposed by the authorities throughout the country, with some areas experiencing up to 15 hours of power cuts in early April. The power cuts have been reduced to 3 hours a day as of July 2022.

The economic crisis has resulted in declines in electricity, fuel, and cooking gas consumption, leading to shortages. The government has even switched off all street lights to conserve electricity.

Long queues have formed in front of petrol filling stations, and casualties include four fatalities due to fatigue and violence. The situation is so dire that the government has suspended fuel sales to non-essential vehicles.

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Protests erupted in Sri Lanka in March 2022, with tens of thousands of supporters of the opposition party, the United People's Force, demanding the president's resignation due to the country's financial crisis.

The protests were not limited to opposition supporters, as locals in Bandarawela blocked the road to demand fuel, forcing Namal Rajapaksa to avoid the area.

On 31 March, a large group gathered around the residence of Gotabaya Rajapaksa in Mirihana to protest against the power cuts, which had reached over 12-hours a day.

The police responded to the protest by attacking the protesters with tear gas and water cannons, leading to the protesters burning a bus carrying riot control troops.

Candle light protests and car horn tooting protests were also reported in several areas, highlighting the widespread discontent with the government's handling of the economy.

The protests continued in May 2022, with the Rajapaksa family home being set on fire by protesters, and Mahinda Rajapaksa resigning as Prime Minister.

Despite the president's refusal to resign, the protests continued, with protesters eventually breaking through police barricades and occupying the president's mansion on 9 July 2022.

The president, Gotabaya Rajapaksa, fled his official residence on 9 July, and his whereabouts were unknown to the public until it was revealed that he had been evacuated by the navy and was on a Navy vessel in Sri Lankan waters.

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The tourism sector in Sri Lanka was a significant contributor to the country's economy. It represented over one-tenth of the GDP.

In 2018, tourism earned Sri Lanka $4.4 billion and contributed 5.6% to GDP. This was a notable achievement.

However, the sector was severely affected by the 2019 Easter bombings. The COVID-19 pandemic further exacerbated the decline, causing tourism to drop to just 0.8% of GDP in 2020.

The World Bank even made a failed prediction in April 2021, stating that the economy would recover in 2021 despite the pandemic's impact.

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Sri Lanka's government has been in crisis mode since the massive Aragalaya protests last year. The protests, sparked by the country's devastating economic crisis, led to mass resignations across the government.

Former President Gotabaya Rajapaksa fled the country in July 2022, leaving behind a power vacuum that still hasn't been filled. The current government, led by President Ranil Wickremesinghe, has struggled to regain popular support.

Despite securing an IMF agreement and slowly recovering from the economic crisis, the government has faced criticism for clamping down on further protests and continually postponing elections.

Corruption and impunity are major issues in Sri Lanka's government and politics. A UN report in September 2022 highlighted that impunity of Sri Lankan officials for human rights violations and economic crimes are causes of the economic crisis.

Sri Lanka ranks 102nd in the Corruption Perceptions Index (CPI), indicating a significant problem with corruption in the country. This low ranking suggests that corruption is a widespread issue that affects various aspects of Sri Lankan society.

Sri Lanka's diplomatic relations have faced challenges in recent years. In January 2022, the Sri Lankan High Commission in Nigeria was temporarily closed down due to lack of foreign reserves.

The country's embassies in Iraq and Norway were also affected, closing in March 2022. This was due to a similar issue of lacking dollar reserves.

The Sri Lankan consulate in Australia was closed at the same time, highlighting the widespread impact of this financial constraint.

Sri Lanka's new president, Anura Kumara Dissanayake, faces daunting challenges, including navigating economic strain and a shifting geopolitical environment.

Sri Lanka owes about $7 billion to China and around $1 billion to India, which has led to a significant economic crisis.

The country has secured an IMF agreement, but it's not clear who will fund essential imports for the next three months at least.

Sri Lanka's government plans to raise funds by restructuring state-owned enterprises and privatising the national airline.

The country's economy has been struggling since the 2019 budget, which gave away a large amount of tax revenue, and falling tax revenues have been a long-standing issue.

Sri Lanka now has debts of more than $50 billion owed to international creditors with little means of repayment.

The crisis is considered "man-made and voluntary" due to the previous government's failure to acknowledge and re-structure the mounting debt earlier.

The country's new standard operating procedure (SOP) to determine which military and non-military ships and aircraft may visit the country is a significant issue that affects regional security.

Sri Lanka's government has clamped down on further protests and continually postponed elections, raising concerns about human rights.

The country's economy has ambled toward a slow path of recovery, but the future remains uncertain.

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In early 2022, Sri Lankans started experiencing power cuts and shortages of basics such as fuel, with inflation rising to 50% a year.

Protests broke out in the capital Colombo in April that year and spread across the country, sparked by the fuel shortage.

The fuel shortage caused petrol and diesel prices to rise dramatically, and the government was forced to ban the sale of petrol and diesel for non-essential vehicles for two weeks in June.

Schools had to close, and people were asked to work from home to help conserve supplies.

President Gotabaya Rajapaksa resigned in June last year, and Prime Minister Ranil Wickremesinghe became acting president, declaring a nationwide state of emergency across the country.

The economic crisis led to severe restrictions on fuel sales, which remain in place to this day.

Here are some key events that highlight the severity of the situation:

The Sri Lankan economic crisis was exacerbated by several external factors. The COVID-19 pandemic had a significant impact on the country's economy, with tourism and remittances declining sharply.

The global economic downturn, particularly in the United States and Europe, also affected Sri Lanka's export market. The country's main export markets experienced a decline in demand for Sri Lankan goods.

Additionally, the global commodity price increases, particularly for food and fuel, put pressure on Sri Lanka's balance of payments.

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External debt is a significant concern for many countries around the world. The average external debt of a developing country is around $1,500 per capita, which can have a major impact on economic stability.

High levels of external debt can lead to a decrease in a country's credit rating, making it harder to borrow money in the future.

For example, in 2020, the country of Sri Lanka had an external debt of over $64 billion, which accounted for more than 80% of its GDP. This high debt-to-GDP ratio made it difficult for the country to service its debt and led to a significant economic crisis.

The International Monetary Fund (IMF) has a debt sustainability framework that helps countries assess whether their external debt is sustainable. If a country's debt is deemed unsustainable, the IMF may provide financial assistance to help the country get back on its feet.

The IMF's debt sustainability framework takes into account a country's debt-to-GDP ratio, the interest rate on its debt, and the country's growth prospects.

The Sri Lankan economic crisis has been making headlines, and it's natural to wonder if its effects will be contained within the country or have a broader impact.

In August 2021, a food emergency was declared in Sri Lanka, indicating that the crisis is already affecting the country's food supply.

Given the unique political decisions that led to the crisis, it's likely to be contained within Sri Lanka rather than causing wider knock-on impacts.

The Sri Lankan government's denial of food shortages and the acknowledgment by the Energy Minister Udaya Gammanpila of the crisis' potential to lead to a financial disaster suggest a complex situation.

The crisis has already led to significant changes in the country's leadership, with the Governor of the Central Bank of Sri Lanka Ajith Nivard Cabraal being replaced by Nandalal Weerasinghe in early April 2022.

Despite the growing fiscal pressures and rising debt service costs, the crisis is unlikely to have a significant impact beyond Sri Lanka's borders.

India was a key player in providing foreign support to Sri Lanka during its economic crisis. In January 2022, India pledged a total of US$2.415 billion to help Sri Lanka overcome its financial constraints.

India extended a $400 million credit line and deferred an Asian Clearing Union settlement of around $500 million under the SAARC currency swap arrangement. They also granted a new line of credit worth $500 million for the purchase of petroleum products.

A $1 billion credit line was activated in March 2022, allowing Sri Lanka to buy urgently needed essential items like food and medicine. This credit line was made possible after India and Sri Lanka formally entered into a credit agreement.

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Chief Minister of Tamil Nadu M. K. Stalin proposed strategies to provide essential commodities to Tamil people in Sri Lanka's North, East, and Central Provinces. However, Tamil political parties in Sri Lanka requested that aid be distributed to all ethnic and religious groups.

India sent 40,000 tonnes of rice to Sri Lanka in April 2022, and by 6 April, they had shipped 270,000 tonnes of fuel. Some shipments were met with bureaucratic hurdles.

The Government of Singapore provided $100,000 as seed money for the Singapore Red Cross's humanitarian public fundraising efforts. China also pledged emergency assistance worth 500 million yuan ($74.2 million) to Sri Lanka in June 2022.

In early 2025, Sri Lanka signed several cooperation agreements with China, focusing on economic development, health, and media cooperation.

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Sri Lanka's economic crisis has had severe consequences, including its inability to buy goods from abroad.

In May 2022, the country failed to make an interest payment on its foreign debt for the first time in its history.

This damaged Sri Lanka's reputation with lenders, making it harder to borrow money on the international markets.

The economic crisis has left Sri Lanka struggling to cope with its financial woes.