With the start of the Covid-19 pandemic, the Sri Lankan economy had started showing its weaknesses. Wrong economic decisions just added to the woes.
Till sometime back who would have imagined that in Sri Lanka 400 grams of milk powder would cost Rs 790 or to purchase one kg of rice, people there would have to shell out 500 Sri Lankan rupees. Well that's not all. The Sri Lankan economy is facing one of its worst ever economic crisis since its independence in 1948.
The economic crisis there can be attributed to as man made disaster, resulting from mismanaged government finances and ill-timed tax cuts, besides the impact of the Covid-19 pandemic. Huge piles of foreign debt, series of Covid-related lockdowns, soaring inflation and shortage in fuel supply has brought the country to the brink of an economic collapse.
The fall in foreign currency reserves and devaluation of currency has adversely impacted the country's economic growth and things are only looking to get worse. A major shortage of fuel has led to army deployed at every petrol station and forcing people to bear the brunt of skyrocketing prices of essentials. There have been long queues of people waiting to buy food and fuel.
The shortage of foreign currency has led to a reduction in the imports of essential items. Sri Lanka depends heavily on imports for essentials like food, sugar, daal, petroleum, paper, medicines, cement among other items. The situation is so grave that government has had to cancel all school examinations for millions of children due to lack of paper.
Read | Sri Lanka to experience 10-hour daily power cuts
How economic crisis unfolded?
With the start of the Covid-19 pandemic, the Sri Lankan economy had started showing its weaknesses. Wrong economic decisions just added to the woes.
Sri Lanka has a modest USD 84 billion economy. It grew from USD 42 billion in 2009 to near USD 88 billion in 2018. But the growth rate of GDP has been on a decline since 2011.
Rajapakse government's wrong economic policies hit the country hard. In December 2019, the government cut VAT rates from 15% to 8%. This led to a fall in indirect tax revenue.
Sri Lanka must repay about USD 4 billion worth of debt this year, but the country's foreign reserves are too low. It has dipped to USD 2.31 billion as of end February.
Sri Lankan economy depends on tourism. Earnings from tourism suffered setback, first, due to Easter bombings of 2019 in Colombo which killed 253 people and then the pandemic.
During the Covid-19 pandemic, its foreign remittances nosedived, and foreign exchange booster tourism sector practically crumbled. Tourism sector is among the top earners.
The Sri Lankan government in 2019, announced substantial tax cuts which ended up lowering its revenue. Its loan arrangements with China too contributed to this crisis.
Read | Sri Lanka food crisis: Milk powder selling at Rs 790 for 400 grams; rice, sugar prices skyrocket
How bad is the situation?
Sri Lanka's retail inflation has already hit 17.5% in February and food inflation has risen over 25%, leading to highly inflated food and cereal prices.
Cooking gas price was raised last weekend by nearly 1,400 Sri Lankan rupees. With this now gas cylinders cost a whopping 4,200 Sri Lankan rupees, which is around Rs 1,200.
Sri Lanka will be experiencing 10-hour daily power cuts from Wednesday due to inadequate power generation, as a result of fuel shortage and unavailability of generators.
School exams for millions of children were cancelled in Sri Lanka owing to the island nation running out of printing paper as they mostly import paper from outside the nation.
Foreign exchange reserve dipped 70% since January 2020. Foreign currency reserves fell to USD 2.31 billion in February, a fall by USD 779 million from December 2021 through January 2022.
Sri Lanka's public debt has risen from 94% of its gross domestic product (GDP) in 2019 to 119% of the GDP in 2021, the International Monetary Fund (IMF) said in early March.
There is also a major shortage of medicines and milk powder. The shortage of medicines resulted in the cancellation of all non-urgent surgeries at the Peradeniya Hospital near Kandy.
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