What is the current state of the Sri Lankan economy which has been facing headwinds since the Covid-19 outbreak?

The roots of the crisis lie in economic mismanagement by successive governments in Colombo. But the current crisis was exacerbated by the deep tax cuts made by Prime Minister Mahinda Rajapaksa during the 2019 election campaign, implemented months before the pandemic. Due to the pandemic, the country’s lucrative tourism industry and remittances of foreign workers caused Sri Lanka to be downgraded by credit rating agencies, effectively pulling it out of international capital markets. Foreign exchange reserves fell by almost 70% in two years. As of February, the country had only $2.31 billion left in its reserves, but faced debt repayments of $7 billion in 2022. The Rajapaksa government’s decision to ban all chemical fertilizers in 2021, which was later reversed, also affected the country’s agriculture sector. , and the significant rice crop declined.

What next for the Rajapaksa regime?

The financial crisis is turning into huge anger against the Rajapaksa family, which dominates the government. The deep anger of farmers and nationalists in their main constituency is evident. The hardline JVP is trying to capitalize on this, and ET has learned that some ministers and coalition partners have expressed displeasure over the situation. This could lead to a change of guard if the crisis is not addressed immediately. Former President Maithripala Sirisena’s Freedom Party has called on President Rajapaksa to form an all-party government to deal with the crisis and said it could leave the coalition if its request is ignored.

Why did President Gotabaya declare a state of emergency?

The acute shortage of foreign exchange has left the government unable to pay for essential imports, including fuel, leading to a 13-hour-long power cut. People are grappling with shortage of fuel and medicines and rising inflation. The country sharply devalued its currency last month ahead of talks with the International Monetary Fund (IMF) for a loan program. The shortage of diesel across the island has paralyzed public transport and the movement of goods. President Rajapaksa declared a state of emergency on Friday, giving security forces sweeping powers, a day after hundreds of protesters clashed with police for several hours and tried to storm his home in anger over the unprecedented economic crisis.

Who has come to the rescue of Sri Lanka?

The IMF will begin discussions with Sri Lankan officials on a possible loan program in the “coming days”. Rajapaksa has also sought help from China and India, especially for fuel and food grains. A diesel shipment under a $500 million line of credit signed with India in February reached Colombo on Saturday. Sri Lanka and India have signed a $1 billion line of credit. Under him, essential things including medicine and rice have been supplied so far. India has so far supported over $2.5 billion under soft loan and currency swap arrangements. China has insisted on refinancing Lanka to pay off its debt. India can provide additional humanitarian assistance if the situation requires it.

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