Sri Lanka’s Economic Issues and Collapse

A government in disarray, an economy in collapse, and a people enraged. This is the present story in Sri Lanka. The story is a series of one government misstep after another, and now a nation is in turmoil.

How did this happen?

A series of poor government decisions and global shocks have led to a complete economic collapse.

In the past few years, tourism, a major propeller for the Sri Lankan economy, has all but stopped. The 2019 Easter bombings and the pandemic inhibited travel to the country. And just as it was beginning to rev up again, Russia invaded Ukraine, an event that raised the price of imports, particularly fuel and food, exponentially.

This occurred at a time when the economy was already severely down, thanks to not only the lack of tourism but also a major hit to its main export—tea—after former President Gotabaya Rajapaksa banned chemical fertilizers.

But the largest hindrance to Sri Lankan prosperity lies in its incredible amount of sovereign debt, much of which was taken on more than a decade ago to cover expenses from the civil war and fund new, attractive infrastructure. 

In 2022, the Sri Lankan rupee has plummeted more than 80% in value, causing over 100% inflation in food prices. The country also lacks foreign reserves and has defaulted on its debts. This has created a perfect storm where the country can no longer afford to import goods — even essentials like fuel, food, and medicine.

So, Sri Lankans are not only experiencing severe economic hardship but also extreme shortages, from power to cooking oil. In the face of these challenges, they took to the streets back in March to call for the resignation of the Rajapaksa-led government.

In early July, the protests escalated. Protesters burned down the prime minister’s house, and thousands of angry Sri Lankans stormed the presidential palace in Colombo. Gotabaya Rajapaksa fled the country and resigned days later, leaving Prime Minister Wickremesinghe in charge.

What now?

Sri Lanka desperately needs to repair both its government and economy. It now needs to rely on relief from other nations and the International Monetary Fund to quell the swelling disaster. This is a nation that, only a few years ago, was one of the fastest-growing economies in Asia.

Sri Lanka’s story should serve as a warning to other nations who are in similar situations, namely, deep in foreign debt. The ongoing crisis between Russia and Ukraine will continue to cause supply shortages and inflation and send other nations into economic collapse.

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