Sri Lanka's worst economic crisis since Independence explained - IN PICS

Sri Lanka, the country which largely depends on foreign essentials, is witnessing its worst economic breakdown since independence triggered by an acute lack of foreign currency to pay for even the most essential imports.

The nation has been unable to pay for fuel shipments because of a foreign exchange shortage due to which long power cuts have been imposed triggering a massive violent protest across Colombo.

Police arrested 53 people and then imposed a curfew in and around Colombo on Friday to contain other sporadic protests.

The closing of borders due to the Covid-19 pandemic adversely impacted the lucrative tourism industry and foreign workers’ remittances to Sri Lanka. In turn, the credit rating agencies moved to downgrade the nation and effectively locked it out of international capital markets.

As per the experts and critics, the root cause of this unprecedented crisis lies in economic mismanagement by successive governments that created and sustained a twin deficit – a budget shortfall alongside a current account deficit.

This apart, the issue was accelerated by deep tax cuts promised by the Sri Lankan president during a 2019 election campaign that was enacted months before the Covid-19 pandemic, which wiped out parts of Sri Lanka’s economy.

As of February, Sri Lanka was left with only $2.31 billion in its reserves but faced debt repayments of around $4 billion in 2022.

In a review of the country’s economy released last month, the IMF said that public debt had risen to “unsustainable levels” and foreign exchange reserves were insufficient for near-term debt payments.

The unprecedented economic crisis forced the Sri Lankan government to impose power cuts from up to 10 to 13 hours as the country struggles to procure fuel.

Angered by shortages of fuel and other essential items, hundreds of protesters on Thursday clashed with police and the military outside Rajapaksa`s residence as they called for his ouster and torched several police and army vehicles.

Indian traders have started loading 40,000 tonnes of rice for prompt shipment to Sri Lanka in the first major food aid since Colombo secured a credit line from New Delhi, two officials told Reuters on Saturday. The shipment of the staple comes before a key festival in Sri Lanka.

After resisting experts' advice to seek help from the IMF despite rising risks for months, the Sri Lanka government has finally prepared a plan to approach the IMF in April.

The IMF will initiate discussions with Sri Lankan authorities on a possible loan program in “coming days”, an IMF spokesman told Reuters.