Colombo, 23 June 2022 (TDI): Sri Lanka’s Prime Minister Ranil Wickremesinghe said on Wednesday that the country’s economy has “completely collapsed.”

This comes as the crisis-torn country faces a worsening situation that has left millions of people without fuel, electricity, and food.

A “grave situation” and a possible “fall to rock bottom”, is how the Prime Minister of Sri Lanka described his country’s faltering economy on Wednesday, as the island nation faces severe food and fuel shortages.

Primarily, Sri Lanka is experiencing its worst financial crisis in seven decades as a result of its foreign exchange reserves plummeting to all-time lows.

Because of this, the country is on the verge of going bankrupt and can’t pay for important imports like food, medicine, and fuel.

Moreover, due to the fuel shortage, patients are unable to travel to hospitals, and food prices are soaring. Rice, a staple in the South Asian nation, has vanished from the shelves of many grocery stores and shops.

This week, lawmakers from the two largest opposition parties are boycotting Parliament to protest Wickremesinghe, who became Prime Minister and Finance Minister just over a month ago but has failed to deliver on his promises to turn the economy around.

Sri Lanka’s Economic Crisis

Sri Lanka is experiencing an economic crisis due in part to its twin deficit economy. A twin economy is one in which domestic spending exceeds national income, making it vulnerable to external debt and dependent on foreign capital flows.

To finance the provision of public services, the government has acquired multiple loans from other nations and international organizations over a number of years.

Economy
Sri Lanka’s Foreign Debt composition

As of 2019, the Sri Lankan government has reduced some taxes in an effort to stimulate the economy, but as a result, its revenues have decreased significantly.

Under these conditions, the government’s reserves were reduced by 70% in two years to pay off some of its debts. Additionally, the Sri Lankan currency has depreciated significantly, making essential goods more expensive for the populace.

Economy
Sri Lanka’s Central Bank devalues the currency

In the same way, tourism in the country has been affected by a number of issues. Initially, a series of extremist attacks on churches and hotels began to impact the industry (which accounted for 5.6% of the nation’s GDP).

According to Sri Lanka's Prime Minister, the country's economy has 'completely collapsed'
Sri Lanka’s tourist arrivals

In 2020, the COVID-19 pandemic prevented travel. While in 2022, a war broke out between Russia and Ukraine, two countries that accounted for the majority of the country’s tourists.

Worst Results of Economic Crisis

As a result, the country’s monthly inflation rate reached an all-time high of 39.1 percent in May 2022, up from 3 percent in January 2021.

According to Sri Lanka's Prime Minister, the country's economy has 'completely collapsed'
Sri Lanka’s inflation rate

The crisis has begun to affect Sri Lanka’s middle class, which comprises an estimated 15 to 20 percent of the metropolitan population. Essentially, the economic crisis is impacting the population’s daily lives. Hospitals have reported medicine shortages.

Likewise, price hikes have made food unaffordable for a portion of the population, and some individuals have already begun to migrate to India to escape the effects of the crisis.

According to Sri Lanka's Prime Minister, the country's economy has 'completely collapsed'
People waiting for food outside market

As a result of the ban on chemical fertilizers, food production in 2022 has been lower than usual, which will likely impact food availability for several months.

Crisis Mitigation Efforts

In recent weeks, the government has implemented a four-day work week for public sector employees to give them time to cultivate their own crops. However, the measures do little to alleviate the hardships faced by many citizens.

Wickremesinghe stated that even $4 billion in credit lines from neighboring India may not be sufficient to sustain Sri Lanka’s current level of economic stability.

The World Bank has also pledged $300 million to $600 million for the purchase of medicine and other vital supplies. Moreover, World Food Program (WFP) has launched an emergency response to provide three million vulnerable people with food assistance.

Sri Lanka has already declared that it will defer the repayment of $7 billion in foreign debt due this year, pending the conclusion of rescue package negotiations with the International Monetary Fund.

It must pay an average of $5 billion per year through 2026. According to Wickremesinghe, a team of US Treasury Department representatives will arrive in Sri Lanka next week.

Wickremesinghe noted that Sri Lanka will also seek assistance from China and Japan, two of its “primary financing countries.”

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