As the economic crisis deepened in Sri Lanka on Monday, protesters in the country’s largest city, Colombo, staged numerous small peaceful protests, defying a nationwide curfew, while police used tear gas to disperse student protesters in the central city of Kandy.
The neighboring country is facing its worst economic crisis since 1948, when it gained independence, which left it on the brink of bankruptcy. President Gotabaya Rajapaksa has had to declare a state of emergency as the country grapples with rising prices, shortages of essentials and power cuts. The government also implemented a nationwide curfew after protests turned violent.
A combination of historically weak public finances, ill-timed tax cuts and the Covid-19 pandemic, which has hit the country’s lucrative tourism industry and foreign remittances, has wreaked havoc on the economy from Sri Lanka. Here is a timeline of events leading up to the current crisis.
Pandemic in 2020
While the sweeping tax cuts announced by Rajapaksa caused a credit rating downgrade in 2020, it was the Covid-19 pandemic in March that year that made matters worse for the island nation. The tourism industry suffered major losses and rating agencies decided to downgrade Sri Lanka and exclude it from international financial markets. The country has also seen a sharp decline in tea and rubber exports due to lower demand.
As a result, Sri Lanka’s GDP shrank by 3.5%, the current account deficit fell to 7.9% of GDP and the budget deficit reached 11.1%.
On April 29 last year, the Lankan government banned the import of chemical fertilizers and other agrochemicals in a bid to make the country the first in the world to practice “only organic” agriculture. While the move was aimed at reducing pressure on foreign exchange reserves, experts slammed it, calling it “unscientific” and saying such a drastic policy change would cause yields to fall sharply.
Rajapaksa, however, claimed that the decision would help save around $200 million incurred on the importation of agrochemicals.
In November, it became clear that the decision had backfired and there had been a drop in agricultural production. The government, in the face of protests, then declared that it would partially lift the ban.
Recovery, however, from the damage already done, has not been easy. In a report published by The Week, Saman Dharmakeerthi, professor of soil fertility and plant nutrition at the University of Peradeniya in Kandy, said the ban led to a reduction in yield, which fell by 25%. Tea cultivation, which is one of the mainstays of the economy, has also been hit hard. Production of pepper, cinnamon and vegetables fell by 30%, Firstpost reported.
The immediate result was that the country became more dependent on foreign countries for rice and other staples.
The food category’s year-on-year inflation rose to 24.7% in February 2022 from 24.4% in January 2022, and that of the non-food group rose to 11% in February 2022 from 10 .2% the previous one. month. Inflation calculated for January 2022 was 16.8%. The higher inflation for the month of February 2022 was mainly due to higher price levels in food and non-food categories.
At the end of March this year, due to the lack of critical foreign currency, the situation became so dire that the country could not pay for vital imports, leading to shortages of everything from life-saving drugs to cement. . As a result, the government announced daily power cuts of 1 p.m. across the country.
Foreign exchange reserves stood at a paltry $2.31 billion and the country was struggling to pay for essential imports including fuel, food and medicine. cut essential imports amid looming debt repayments.
The crisis forced a devaluation of the currency and affected payments for essential imports such as food, medicine and fuel. Sri Lanka announced that the headline inflation rate for February 2022 was 17.5%, the highest since 2015.
The immediate knock-on effect of inflation was seen when Sri Lanka stationed soldiers at hundreds of state-run gas stations to help distribute fuel after a sudden spike in commodity prices and the accompanying shortages forced tens of thousands of people to queue for hours.
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