Sri Lanka in crisis: What, why and how?

Sri Lanka’s unprecedented economic crisis looks to have finally toppled President Gotabaya Rajapaksa.

Here is what you should know about the ongoing political turmoil.

What happened?

• Rajapaksa fled to the Maldives early on Wednesday after months of turmoil culminated in protesters converging on the presidential residence.
• Prime Minister Ranil Wickremesinghe declared a state of emergency and a curfew with immediate effect as thousands of people demanding his resignation surrounded his office in the capital Colombo.
• Police fired several rounds of tear gas and a military helicopter briefly circled overhead but the protesters appeared undeterred as violence and political chaos gripped the island nation of 22 million people.
• The speaker of parliament said Rajapaksa had approved Wickremesinghe acting as president, invoking a section of the constitution dealing with times when the president is unable to fulfil his duties.

How serious is the crisis?

• Sri Lanka’s debt-laden economy has “collapsed” as it runs out of money to pay for food, fuel and medicine.
• The island is relying on help from neighbouring India, China and from the International Monetary Fund (IMF).
• Wickremesinghe, who took office in May, said the economy was heading for “rock bottom”.
• Sri Lankans are skipping meals as they line up for hours to buy scarce fuel and cooking gas.
• The government owes $51bn and is unable to make interest payments on its loans.
• Tourism, an important engine of economic growth, sputtered because of the pandemic.
• Country’s currency has collapsed by 80 percent, making imports more expensive and worsening inflation.
• The finance ministry says Sri Lanka has only $25m in usable foreign reserves and needs $6bn to stay afloat for six months.
• The result is a country on the edge of bankruptcy, with hardly any money to import fuel, milk, medicine and even toilet paper.

How did it come to this?

• Analysts say economic mismanagement by successive governments weakened Sri Lanka’s public finances.
• Situation was exacerbated by deep tax cuts enacted by Rajapaksa government soon after it took office in 2019.
• Months later, the COVID-19 pandemic struck, wiping out much of Sri Lanka’s revenue base, mainly from tourism.
• Remittances from nationals working abroad dropped, forcing the government to draw from foreign exchange reserves.
• Fuel shortages led to long queues at filling stations as well as frequent blackouts, hospitals ran short of medicine.
• Runaway inflation reached 54.6 percent last month and could rise to 70 percent, the central bank said.
  

  

What did the government do?

• Despite the rapidly deteriorating economic crisis, the Rajapaksa government initially held off talks with the IMF.
• For months, opposition leaders and experts urged the government to act but it held its ground, hoping tourism would bounce back.
• Much of public’s anger is focused on President Gotabaya Rajapaksa and his brother, ex-Prime Minister Mahinda Rajapaksa.
• In April 2021, the president banned imports of chemical fertilisers, a move that decimated staple rice crops, driving prices higher.
• Eventually, the government sought help from India and China – regional powers jostling for influence over the island.
• India says it provided support worth over $3.5bn this year.
• China intervened less publicly but said it supports the nation’s efforts to restructure its debt.
• Sri Lanka eventually opened talks with the IMF.

What happens next?

• A sitting president removed by street protests is unprecedented in Sri Lanka’s post-independence history.
• PM Wickremesinghe has taken over as acting president, a move that is questioned by legal experts.
• Bailout talks with the IMF continue, with Wickremesinghe saying he expects a preliminary agreement by late July.
• “Sri Lanka pins last hopes on IMF,” said a recent headline in the Colombo Times newspaper.
• Political parties agreed legislators will elect a new president on July 20 but are struggling to form a new government.