As Sri Lankans stare at empty supermarket shelves, hereÕs how the countryÕs economy slid into crisis
Scroll.in : A queue outside a state-run supermarket in Colombo to buy essential food items on September 3 as Sri Lanka began imposing price controls on essential food after using a state of emergency to seize allegedly hoarded stocks of sugar and rice. | Ishara S Kodikara / AFP
Crisis is upon Sri Lanka. Last week, President Gotabaya Rajapaksa decreed a state of emergency over food supplies, the dollar was being sold for over 230 Sri Lankan rupees on the black market (down from 216.55 Sri Lankan rupees on August 19), Sri Lanka was downgraded to CCC- by Standard & Poor rating agency (Fitch had downgraded the country to this level back in November) and general panic is setting in.
The most immediate impact for the ordinary citizen is the empty shelves in supermarkets and pharmacies, which are caused by the Sri Lankan governmentÕs ban on imports. Import bans, something Sri Lankans have become intimately (and involuntarily) familiar with over the course of the past year, are only a symptom of a much larger macroeconomic problem.
Sri LankaÕs economic crisis is not one-dimensional, it is a hodge-podge of internal and external factors, varying in degree of severity and as intertwined as a spiderÕs web. I will therefore, to the best of my knowledge and understanding, document here the main causes and aggravating factors for anyone interested in this unfolding crisis.
Main causes
The economic crisis currently unfolding in Sri Lanka can be traced down to a few leading and severe reasons.
1. Debt sustainability, or the lack thereof
It is perhaps no surprise that the first reason mentioned is that of debt sustainability, or the lack thereof. Although certainly not new (economists have raised concerns as far back as 2019), it has overtaken economic conversations in importance in the recent past. Debt sustainability, according to the International Monetary Fund, refers to the governmentÕs capacity to meet its current and future debt obligations without exceptional financial assistance or defaulting on its obligations.
By the end of 2020, Sri LankaÕs debt-GDP ratio was 101% and is expected to rise to 108% by 2022. Between 2021 and 2025, Sri Lanka requires $4 billion-$5 billion annually to meet its foreign debt obligations. This is next to impossible while Sri Lanka runs not only a whopping budget deficit but also a staggering balance of payments deficit (a balance of payments deficit means the value of money flowing out of the country is greater than the value of money flowing in to the country). In July 2021, upon settling a $1 billion bond, Sri LankaÕs foreign exchange reserves fell to a low $2.8 billion.