Sri Lanka economic crisis: What you need to know

Sri Lanka, which has been reeling under severe economic crisis, has decided to shut schools and only allow fuel supplies to essential services like health, trains and buses for two weeks starting Tuesday.

The country's foreign exchange reserves are at a record low and the country is struggling to pay for imports of food, fuel, medicine and other essentials.

As fuel reserves hit rock bottom with supplies barely enough for just one more day, government spokesman Bandula Gunawardana said the sales ban was to save petrol and diesel for emergencies, reported AFP.

As Sri Lanka falls deeper into the worst economic crisis in seven decades, people have been asked to work from home, and schools in the capital Colombo have closed in a bid to save fuel https://t.co/nwdPcvfglT pic.twitter.com/3UedFRjp6S

— Reuters (@Reuters) June 27, 2022

Industries like garments are left with fuel for only about a week to 10 days. Current stocks of the country will exhaust in just under a week based on regular demand, Reuters calculations show.

HOW BAD IS THE SITUATION?

• Sri Lanka has never seen an economic crisis like this. And in the last one month the situation has gone from bad to worse. The government owes $51 billion and is unable to make interest payments on its loans.
• The island nation's currency has collapsed by 80 per cent, making imports more expensive and worsening inflation that is already out of control, with food costs rising 57%, according to official data, reported AP.

• While fuel will be given only to essential services, the government has told employees to work from home, while schools have been shut for a week in Colombo and surrounding areas.
• The Ceylon Electricity Board (CEB) lost 65 billion rupees ($185 million) in the first quarter and sought a nearly ten-fold price hike for the heavily-subsided smallest power consumers, the Public Utilities Commission of Sri Lanka (PUCSL) said. Currently, anyone using less than 30 kilowatts a month pays a flat 54.27 rupees ($0.15), which the CEB sought to raise to 507.65 rupees ($1.44), reported AFP.

WHAT LED TO THIS CRISIS

• First the Covid-19 crisis hammered Sri Lanka's vital income from tourism. This starved the country of foreign currency needed to pay off its debt.The government was forced to ban many imports, which led to inflation, severe shortages and power blackouts. In April, the Sri Lanka government announced that it was defaulting on its USD 51 billion foreign debt, reported AFP.
• According to a report in Reuters, critics say that the roots of the crisis lie in economic mismanagement by successive governments that created and sustained a twin deficit - a budget shortfall alongside a current account deficit.
• After winning the elections in 2019, President Gotabaya Rajapaksa announced deep tax cuts. The sweeping tax cuts led to credit rating agencies downgrading Sri Lanka in 2020. This meant the country had no access to international financial markets.

• Sri Lanka started using its foreign reserves resulting in plummeting of foreign reserves. As of February 2022, the country was left with only USD 2.31 billion in its reserves but faced debt repayments of around USD 4 billion in 2022, reported Reuters.
• In April 2021, Rajapaksa banned imports of chemical fertilisers in a push for organic farming. It caught farmers by surprise and destroyed staple rice crops, driving prices higher. The Ukraine war has also pushed prices of food and oil higher. Inflation was near 40% and food prices were up nearly 60% in May, reported AP.

HOW IT IS AFFECTING THE COMMON PEOPLE

As life is getting tougher with the economic crisis worsening, many people are trying to flee the country.The navy in the early hours of Monday arrested 54 people off the eastern coast as they tried to leave by boat, reported Reuters.

Four out of five people in Sri Lanka have started skipping meals as they cannot afford to eat, the UN has said, warning of a looming 'dire humanitarian crisis' with millions in need of aid, reported AFP.

WHAT IS THE WORLD DOING TO HELP SRI LANKA

• An IMF team is visiting Sri Lanka for talks on a $3 billion bailout package. The country has received about $4 billion in financial assistance from India and the Sri Lankan government said on Monday that the United States has agreed to provide technical assistance for its fiscal management, reported Reuters.
• Sri Lanka defaulted on its $51 billion foreign debt in April, and is in talks with the International Monetary Fund for a bailout.
• Sri Lanka has said that the World Bank will give $300 million to $600 million to the country to buy medicine and other essential items.