Sri Lanka is protesting because of the strong economic crisis. What does Ukraine have to do with it?

what’s going on in sri lanka

Earlier in the week, Sri Lanka appeared twice in Russian media reports. The first news is that Aeroflot has announced the start of flights to the island nation from April 8th. Second, there is serious instability in the country: Military personnel assigned to guard the gas stations took to the streets after the riot in some of them due to fuel shortages.

In one of the queues, the driver allegedly killed a motorcyclist; According to the news of Channel News Asia, three more elderly people who had been waiting in the queue for several days died.

Turn off the electricity every day due to the lack of fuel in the country – the island has been without power for seven and a half hours.

The Public Utilities Commission explained: The government doesn’t have the currency to buy oil, so it’s harder every day to keep power plants running.

As of today, the country also suffers from shortages of food and basic necessities. Sri Lanka is a net importer of almost all categories of goods, including pharmaceuticals. Various sources also reported that school exams had to be canceled in Sri Lanka due to paper shortages.

According to Energy Minister Uday Gammanpil, this crisis is the worst in the country’s history since it gained independence from Britain in 1948.

How did the crisis arise?

A week before these events, Bloomberg reported on Sri Lanka’s impending default. At the beginning of the month, $2 billion in foreign exchange reserves remained at the disposal of the authorities, $7 billion in government debt and $1 billion in bond debt, but must be repaid this year, according to the agency.

Sri Lanka owes foreign investors a total of $45 billion, of which $15 billion is in government bonds.

With soaring oil prices and falling tourism revenues, the government is trying to avoid the worst-case scenario: Authorities have raised interest rates, devalued the local currency, and imposed restrictions on non-essential imports. However, inflation of 15%, one of the worst in Asia, risks frustrating the government’s efforts.

President Gotabaya Rajapaksa turned to the International Monetary Fund for help. However, the systemic nature of the problems in the Sri Lankan economy may require much more funds and, most importantly, time that the authorities currently do not have.

The Sri Lankan economy began to experience difficulties with the onset of COVID-19. Nikkei Asia described the situation at that time most effectively, describing the country’s economy as “a ticking time bomb that could explode at any moment”.

Faced with a virtual halt in economic activity during the pandemic, the government opened the “printing shop” at full capacity – according to various sources, Sri Lanka’s money supply increased by 42% from December 2019 to August 2021. Parallel to this, the country was losing its foreign exchange reserves.

But the causes of the current economic crisis do not lie solely in the consequences of the coronavirus. Since 2009, the country has been heavily indebted to rebuild the economy after a 30-year civil war between its Buddhist-majority Sinhala and Hindu-majority Tamil minority. Regular payments to foreign debt have depleted Sri Lanka’s foreign exchange reserves, especially in the background of the pandemic.

During the rebuilding of the country after a devastating war, the authorities spent about 1.5 – 2 billion dollars a year on the restoration of transport infrastructure alone – and these were borrowed funds.

The government had high hopes for tourism, which regularly replenishes the treasury with billions of dollars. Sri Lanka earned $3.6 billion from tourism in 2019, according to official figures, before the pandemic nearly fivefolded that figure in two years. Tourists from Russia, Ukraine, Poland and Belarus continued to travel to the country until the protests began. However, with the start of Russian special operations, the flow of tourists to the country has decreased significantly, according to Bloomberg.

Who to blame?

Experts interviewed by socialbites.ca noted that the current crisis is a number of factors in which the wrong assessment of the economic situation by local authorities played an important role.

MGIMO professor Sergei Lunev is confident that the source of the current crisis can be found in global world events. The expert drew attention to the sharp increase in the prices of raw materials, especially for energy production.

“First came a blow from the pandemic; now – from the events of Ukraine. There is a worldwide impact here. Accordingly, the solution of the problems in Sri Lanka will depend to some extent on how countries at the global level solve the accumulated problems,” he said.

The professor said that the corrupt government of Prime Minister Mahinda Rajapaksa is equally responsible for the current crisis.

“Corruption negatively affected the development of the crisis. The unsuccessful actions of the authorities have exacerbated the problem, but in principle it remains global, ”Lunev summed up.

IMEMO RAS employee Aleksey Kupriyanov drew attention to the problems caused by the devaluation of the local currency and compared the current situation with the financial crisis in India in 1991.

“There is a serious problem in Sri Lanka with the availability of money to buy food, medicine and fuel. The situation is temporary, but unpleasant. The IMF is likely to help the country. In general, anyone can provide financial assistance. “Whoever provides foreign currency reserves to Sri Lanka will help extinguish the crisis,” Kupriyanov said.

“The country is in debt like silk. The authorities received a lot of money from private companies, mostly in Western markets.

These huge debts need to be restructured – but how this will be done is not yet clear. The cash problem is a short-term problem. Restructuring is a more serious matter,” he said.