Sri Lanka’s aggravating economic crisis

Contact Counsellor

Sri Lanka’s aggravating economic crisis

  • Sri Lanka’s economic crisis is worsening, putting citizens through enormous hardship.
  • Price of cooking gas spiked to LKR 4,199 (roughly ₹1,150), milk powder shot up by LKR 600 a kg, and authorities were forced to cancel school examinations for millions of students, due to a shortage of paper.

Why are prices soaring and why is there a shortage?

  • The first wave of the pandemic in 2020 offered early and sure signs of the distress
  • The lack of a comprehensive strategy to respond to the crisis then, coupled with certain policy decisions last year — including the government’s abrupt switch to organic farming —widely deemed “ill-advised”, further aggravated the problem.
  • In August last year, the government declared emergency regulations for the distribution of essential food items, amid wide import restrictions to save dollars which in turn led to consequent market irregularities, and reported hoarding.
  • Fears of a sovereign default rose by the end of 2021, with the country’s foreign reserves plummeting to $1.6 billion, and deadlines for repaying external loans looming.
  • All the same, without enough dollars to import essentials such as food, fuel, and medicines, the year 2022 began on a rather challenging note, marked by further shortages and an economic upheaval.

What is happening on the ground?

  • The Sri Lankan rupee has fallen to nearly 265 against the U.S. dollar.
  • CPI is at 16.8% and foreign reserves stood at $2.31 billion at the end of February.
  • Citizens have to wait in queues for fuel, a shortage of cooking gas, with prolonged power cuts in many localities and struggles to find medicines for patients.
  • In families of working people, the crisis is translating to cutting down on milk for children, eating fewer meals, or going to bed hungry.

Is there resistance?

  • Both citizens and different segments of the political opposition are taking to the streets, demanding the resignation of the current President.

Government’s response

  • The government is now in talks with the IMF to find a way to pay off annual loan installments, sovereign bonds.
  • It is unclear how the IMF will support Sri Lanka and to what extent its support might help the country cope with the crisis.
  • Colombo has also sought support from various bilateral partners, including India, by way of loans, currency swaps, and credit lines for import of essentials.

How is India helping?

  • In January 2022, India extended assistance totalling $ 2.4 billion including an $400 million RBI currency swap, a $500 million loan deferment, and credit lines for importing food, fuel, and medicines.
  • Indian EAM: Neighborhood first, India stands with Sri Lanka and $1 billion credit line signed for supply of essential commodities.
  • China is considering Sri Lanka's recent request for further $2.5 billion assistance, in addition to the $2.8 billion Beijing has extended since the outbreak of the pandemic.

How is India’s assistance being viewed in Sri Lanka?

  • Sacking key infra projects: The leadership has thanked India for the timely assistance, but there is growing skepticism in Sri Lankan media and some sections, over Indian assistance “being tied” to New Delhi inking key infrastructure projects.
  • Deep incursion: They mainly include the strategic Trincomalee Oil Tank Farm project; the National Thermal Power Corporation’s recent agreement with Ceylon Electricity Board to set up a solar power plant in Sampur, with investment from India’s Adani Group.
  • Diplomatic blackmail: SL media accuses New Delhi of resorting to “diplomatic blackmail”. The political opposition has accused the Adani Group of entering Sri Lanka through the “back door”, avoiding competitive bids and due process.