Sri Lanka: the cost-of-living crisis you haven’t heard about

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Much has been said about the current cost-of-living crisis in the UK, which is predicted to cause the greatest fall in living standards for decades. But 5,500 miles away on the island nation of Sri Lanka, a cost-of-living crisis has already struck hard.

Some 22 million inhabitants are currently facing the worst economic crisis in the country’s 74-year history. The consequences are dire—headline inflation has skyrocketed to 29.8%, meaning ordinary families are unable to afford basic goods. A chronic shortage of imported goods including food, medicine and fuel has resulted in long queues forming at the shops and pumps – in one week in March, four people died as they queued for petrol.

There are growing fears that the economic crisis will cascade into a health crisis, as the crumbling healthcare system struggles to supply the medicines and transport required for patient care. People are enduring daily power cuts, lasting up to 13 hours a day. A paper shortage resulted in the cancellation of school exams for millions. And the situation is still getting worse.

Worst economic crisis in the country’s 74-year history

The immediate cause of the crisis appears simple—Sri Lanka has run out of foreign reserves, and has just defaulted on its mounting debts. Latest government estimates suggest that the country has a mere $50 million in foreign reserves remaining, while the country failed to pay $78 billion in debt interest payments due in April. This is, of course, problematic for an island that heavily relies upon imports to serve the population, with the accumulation of foreign debt (around £40 billion) meaning Sri Lanka lacks the funds to cover both its debts and imports.

External events have not helped the country’s fortunes either. The Covid-19 pandemic resulted in the nationwide shutdown of the country’s borders, devastating the tourism industry that makes up a critical part of the country’s economy (tourists spent $5.6 billion in the country in 2018). The war in Ukraine has exacerbated the crisis, as the global spike in oil prices means it has become even more expensive for Sri Lanka to purchase fuel imports, which it needs to power its generators. 

But in actuality, the causes of this crisis have been unravelling for decades, as government mismanagement of the economy has created some of the conditions for today’s crisis. Current President Gotabaya Rajapaksa served as a defence minister for 10 years before assuming power in 2019. His brother, Mahindra, was appointed Prime Minister, having served as President himself until 2015. Apart from a brief hiatus from 2015 to 2019, the Rajapaksa family has been at the centre of the country’s fragile democracy in the past two decades, and hence have overseen many of the decisions leading to this crisis. While the Rajapaksa family have appealed to Sinhalese Buddhists who make up the majority of the country’s population, the family have been rocked by alleged corruption and infighting which act as a precursor to the economic decisions they have made.

For years, the government stimulated rapid economic growth through borrowing, foreign investment, and major tax cuts, including a 7% cut to VAT rates in 2019. In the short term, these policies have resulted in great prosperity for the developing nation and allowed them to recover from previous crises including natural disasters, civil wars and terrorist attacks, but this strategy had its side effects— foreign debt ballooned to $51 billion, with the payment of $7 billion in debts due for this year now suspended. The Sri Lankan currency has also inflated, while one government minister estimated that the cuts to VAT meant the country lost $1.4bn in revenue per year. 

Sri Lanka is now relying on the international community for an immediate bailout

As a result, Sri Lanka is now relying on the international community for an immediate bailout. With the country needing around $3 billion to pay for imports and even more money to start paying its debt, Sri Lanka is negotiating with the IMF to provide loans to relieve debts (subject to conditions including raising tax), while the World Bank have pledged $600 million to cover imports. Meanwhile, the crisis is causing a headache for the two major superpowers in the region—India and China.

From China’s perspective, Sri Lanka is a crucial country to lure into its sphere of influence, having invested massively in the island’s infrastructure in recent times. Sri Lanka have awarded China several contracts to build up infrastructure in the country, including the promise of a new port for the country’s capital, Colombo, as part of the Belt and Road initiative. In the short term though, China appears reluctant to heed calls to provide a credit line to Sri Lanka with the Chinese not happy with Sri Lanka’s decision to ask the IMF for financial aid, although the two countries have entered talks on restructuring the $6.5 billion debt that Sri Lanka owes to China.

This means India has scrambled to provide immediate support to its neighbour, both in fear of China expanding its regional influence, and perhaps more immediately, in fear of a spillover of the crisis into Indian territory. India has already pledged $1.9 billion in credit lines and could potentially help Sri Lanka cover some of its imports by sending essential goods like fuel and fertiliser to the island. Should the crisis continue, Sri Lanka could well become an arena for geopolitical conflict, as China and India intensify their competition for influence over the island nation and its population.

On the ground in Sri Lanka, thousands of ordinary citizens have taken part in daily protests across the country since March, with protests turning more violent in recent times, even resulting in the death of an MP. In response, the President has invoked two states of emergency, and attempted to enforce overnight curfews and social media bans in a desperate attempt to quell the unrest. There has also been radical changes in government — with the exception of President Gotabaya, the whole cabinet has resigned including Prime Minister Mahindra. Ranil Wickremesinghe has been appointed as the new Prime Minister, who ominously warned that the situation will worsen over the next two months, and made an usual call to the protesting youth movement to take up positions in government committees.

Discontent in the government is set to continue to rise and spill onto the streets, as people defy the restrictions to voice their pain. As feared, the crisis is only going to get worse as Sri Lanka’s battles to cover both its inflating debts and imports, with ordinary citizens bearing the brunt of an extreme cost-of-living crisis, just another in a line of crisis to have plagued the country since its independence.

Image: Angelo Juan Ramos via Wikimedia Commons

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