In addition to the consequences of the Covid-19 epidemic, the Sri Lankan economy has been suffering from one of the greatest economic crises it has ever experienced due to mismanaged government finances and poorly timed tax reductions. The country’s economic progress has been hampered by a series of lockdowns, rising inflation, a scarcity of fuel, a decline in foreign currency reserves, and currency depreciation, among other factors.
According to government figures, economic growth in Sri Lanka was 1.8 percent in the fourth quarter of the fiscal year 2021, which brought the country’s annual growth rate to 3.7 percent. It was lower than the 1.8 percent expected in the previous quarter. The central bank of Sri Lanka had predicted a growth rate of 5 percent for the entire year ahead. Several countries, including India, China, and Bangladesh, have provided help to Sri Lanka. The International Monetary Fund has also approached to provide financial assistance (IMF).
What led to this crisis?
Sri Lanka’s economy was already at risk before the breakout of the Covid virus epidemic in the country. Additionally, the lockdowns had a substantial detrimental impact on the informal sector, which accounts for around 60% of all workers in the country, compounding the country’s issues. Foreign currency reserves have plummeted by 70% in the last two years, making it increasingly difficult to pay for imports such as food and gasoline. Or, to put it another way, a severe lack of foreign currency was the root cause of the financial crisis.
When the Covid outbreak occurred, it had a severe impact on the tourism business in the country. In addition, remittances from Sri Lankan expatriates have plummeted. Even though the country would have to make $4 billion in debt payments this year, the country’s foreign reserves were only $2.31 billion as of February. Colombo thinks tank Advocate Institute’s Dhananath Fernando claims that “the reason for the shortages is not a lack of any goods, but rather a lack of cash.” The $4 billion debt includes a $1 billion international sovereign bond with a maturity date of July that is part of the $4 billion debt.
Power was out for periods of up to ten hours at a time.
Already fuel shortages created extensive power outages that lasted for many hours daily. Power interruptions extended to 10 hours on Wednesday, bringing the daily power outages to 20 hours. Power shortage occurring every seven hours for citizens all around the country since the beginning of the month. There is around a 750-megawatt gap in thermal power generation due to a lack of fuel for hydropower generation. Officials in Sri Lanka warned AFP that the country’s reservoirs were dangerously low due to the lack of rain over the past few months.
Coal and oil are imported in limited quantities due to a scarcity of forex cash reserves. The country’s primary fuel retailer, the state-owned Ceylon Petroleum Corporation PC (CPC), estimated that it would take two days to complete the project. Those who are delayed in long lineups at gas stations should leave and not return until imported petroleum has been unloaded and distributed by the Canadian Petroleum Corporation (CPC).
Fight for gas supplies.
Because of the severity of the crisis, people have to battle to obtain even the most essentials. Following periodic protests by thousands of people standing in line for gasoline last week, Sri Lanka dispatched troops to the country’s gas stations. Fuel shortages resulted in long lines at gas stations and rolling power outages in numerous regions. Several thermal power plants across the country are down due to diesel shortages.
Fuel prices have increased by 92 percent, and diesel prices have increased by 76 percent since the beginning of the year. Sources claim that it took around 12 days for $44 million in LP gas and kerosene to be paid for the last batch of supplies.
Depreciation of a currency
According to the Sri Lankan central bank, the Sri Lanka Rupee has been devalued by 15%, depending on the conditions. The Central Bank of Sri Lanka has set a dollar-to-LKR exchange rate cap of 230 rupees, an increase from the previous maximum of 200-203 LKR, which is effective immediately. In December, CBSL launched a flurry of measures an additional 10 LKR every dollar as an incentive. However, remittances decreased by 61.6 percent in January, from $675 million a year earlier, demonstrating that the initiatives had little impact.