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What’s happening in Sri Lanka and how did the economic crisis start?

Published

4 years ago

2022/04/17

By R Ramakumar, Professor of Economics, Tata Institute of Social Sciences

The island nation of Sri Lanka is in the midst of one of the worst economic crises it’s ever seen. It has just defaulted on its foreign debts for the first time since its independence, and the country’s 22 million people are facing crippling 12-hour power cuts, and an extreme scarcity of food, fuel and other essential items such as medicines.

Inflation is at an all-time high of 17.5%, with prices of food items such as a kilogram of rice soaring to 500 Sri Lankan rupees when it would normally cost around 80 rupees. Amid shortages, one 400g packet of milk powder is reported to cost over 250 rupees, when it usually costs around 60 rupees.

On April 1, President Gotabaya Rajpaksa declared a state of emergency. In less than a week, he withdrew it following massive protests by angry citizens over the government’s handling of the crisis.

The country relies on the import of many essential items including petrol, food items and medicines. Most countries will keep foreign currencies on hand in order to trade for these items, but a shortage of foreign exchange in Sri Lanka is being blamed for the sky-high prices.

Many believe Sri Lanka’s economic relations with China are a main driver behind the crisis. The United States has called this phenomenon debt-trap diplomacy . This is where a creditor country or institution extends debt to a borrowing nation to increase the lender’s political leverage if the borrower extends itself and cannot pay the money back, they are at the creditor’s mercy.

However, loans from China accounted for only about 10% of Sri Lanka’s total foreign debt in 2020. The largest portion about 30% can be attributed to international sovereign bonds. Japan actually accounts for a higher proportion of their foreign debt, at 11%.

Defaults over China’s infrastructure-related loans to Sri Lanka, especially the financing of the Hambantota port, are being cited as factors contributing to the crisis.

But these facts don’t add up. The construction of the Hambantota port was financed by the Chinese Exim Bank. The port was running losses, so Sri Lanka leased out the port for 99 years to the Chinese Merchant’s Group, which paid Sri Lanka US 1.12 billion.

So the Hambantota port fiasco did not lead to a balance of payments crisis (where more money or exports are going out than coming in), it actually bolstered Sri Lanka’s foreign exchange reserves by US 1.12 billion.

Post-independence from the British in 1948, Sri Lanka’s agriculture was dominated by export-oriented crops such as tea, coffee, rubber and spices. A large share of its gross domestic product came from the foreign exchange earned from exporting these crops. That money was used to import essential food items.

Over the years, the country also began exporting garments, and earning foreign exchange from tourism and remittances (money sent into Sri Lanka from abroad, perhaps by family members). Any decline in exports would come as an economic shock, and put foreign exchange reserves under strain.

For this reason, Sri Lanka frequently encountered balance of payments crises. From 1965 onwards, it obtained 16 loans from the International Monetary Fund (IMF). Each of these loans came with conditions including that once Sri Lanka received the loan they had to reduce their budget deficit, maintain a tight monetary policy, cut government subsidies for food for the people of Sri Lanka, and depreciate the currency (so exports would become more viable).

But usually in periods of economic downturns, good fiscal policy dictates governments should spend more to inject stimulus into the economy. This becomes impossible with the IMF conditions. Despite this situation, the IMF loans kept coming, and a beleaguered economy soaked up more and more debt.

The last IMF loan to Sri Lanka was in 2016. The country received US 1.5 billion for three years from 2016 to 2019. The conditions were familiar, and the economy’s health nosedived over this period. Growth, investments, savings and revenues fell, while the debt burden rose.

A bad situation turned worse with two economic shocks in 2019. First, there was a series of bomb blasts in churches and luxury hotels in Colombo in April 2019. The blasts led to a steep decline in tourist arrivals with some reports stating up to an 80% drop and drained foreign exchange reserves. Second, the new government under President Gotabaya Rajapaksa irrationally cut taxes.

Value-added tax rates (akin to some nations’ goods and services taxes) were cut from 15% to 8%. Other indirect taxes such as the nation building tax, the pay-as-you-earn tax and economic service charges were abolished. Corporate tax rates were reduced from 28% to 24%. About 2% of the gross domestic product was lost in revenues because of these tax cuts.

In March 2020, the COVID-19 pandemic struck. In April 2021, the Rajapaksa government made another fatal mistake. To prevent the drain of foreign exchange reserves, all fertiliser imports were completely banned. Sri Lanka was declared a 100% organic farming nation. This policy, which was withdrawn in November 2021, led to a drastic fall in agricultural production and more imports became necessary.

But foreign exchange reserves remained under strain. A fall in the productivity of tea and rubber due to the ban on fertiliser also led to lower export incomes. Due to lower export incomes, there was less money available to import food and food shortages arose.

Because there is less food and other items to buy, but no decrease in demand, the prices for these goods rise. In February 2022, inflation rose to 17.5%.

n all probability, Sri Lanka will now obtain a 17th IMF loan to tide over the present crisis, which will come with fresh conditions.

A deflationary fiscal policy will be followed, which will further limit the prospects of economic revival and exacerbate the sufferings of the Sri Lankan people. (PTI)

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Only single MP refuses salary as Parliament details pays and allowances

Published

28 mins ago

2026/02/22

Thilina Walpola

SJB Badulla District MP Nayana Wasalathilake is the only MP to forego salary and allowances, with all payments suspended following his written notification on August 20, 2025.

Only one Member of Parliament has chosen not to receive the salaries and allowances entitled to MPs, Prime Minister Dr. Harini Amarasuriya revealed in Parliament last Thursday, shedding light on the financial perks enjoyed by members of the Tenth Parliament.

Speaking on Thursday (Feb. 19) in response to a question from SJB Badulla District MP Chaminda Wijesiri, the Prime Minister outlined the full range of pay and allowances provided to parliamentarians.

According to Dr. Amarasuriya, MPs receive a monthly allowance of Rs. 54,285, an entertainment allowance of Rs. 1,000, and a driver’s allowance of Rs. 3,500—though MPs provided with a driver through the Ministry of Public Security and Parliamentary Affairs are not eligible for the driver’s allowance.

Additional benefits include a telephone allowance of Rs. 50,000, a transport allowance of Rs. 15,000, and an office allowance of Rs. 100,000. MPs are also paid a daily sitting allowance of Rs. 2,500 for attending parliamentary sessions, with an additional Rs. 2,500 per day for participation in parliamentary sittings and Rs. 2,500 per day as a committee allowance.

Committee meetings held on non-parliament sitting days also attract Rs. 2,500 per day.

Fuel allowances are provided based on the distance between an MP’s electoral district and Parliament. National List MPs are entitled to a monthly allocation equivalent to 419.76 litres of diesel at the market price on the first day of each month.

Despite the comprehensive benefits, only SJB Badulla District MP Nayana Wasalathilaka has opted not to draw a salary or allowances. Dr. Amarasuriya said that in accordance with a written notification submitted by MP Wasalathilaka on August 20, 2025, payments have been suspended since that date.

The Prime Minister also confirmed that she, along with the Speaker, Deputy Speaker, committee chairs, ministers, deputy ministers, the Opposition Leader, and senior opposition whips, have all informed the Secretary-General of Parliament in writing that they will not claim the fuel allowance.

Challenging the ruling party’s voluntary pledge to forgo salaries, MP Wijesiri pointed out that all MPs except Wasalathilaka continue to receive their salaries and allowances. “On one hand you speak about the people’s mandate, which is good. But the mandate also included people who said they would voluntarily serve in this Parliament without salaries. Today we have been able to prove, Hon. Speaker, that except for one SJB MP, the other 224 Members are drawing parliamentary salaries,” he said.

The Prime Minister responded by defending the political culture and practice of allocating portions of MPs’ salaries to party funds. Referring to previous practices by the JVP and NPP, she said: “It is no secret to the country that the JVP has for a long time not personally taken MPs’ salaries or any allowances. I think the entire country knows that these go to a party fund. That is not new, nor is it something special to mention. The NPP operates in the same way. That too is not new; it is the culture of our political movement.”

When MP Wijesiri posed a supplementary question asking whether diverting salaries to party funds was an indirect method of taking care of MPs, Dr. Amarasuriya said: “There is no issue there. No question was raised; the Member made a statement. What we have seen throughout this week is an inability to understand our political culture and practice, and a clash with decisions taken by political movements that misused public funds. What is coming out is a certain mindset. That is why there is such an effort to find fault with the 159. None of these facts are new to people. He did not ask a question, so I have nothing to answer.”

The disclosures come days after the Government moved to abolish the parliamentary pension, a measure that has sparked renewed debate over MP compensation and the transparency of funds allocation.

News

Illegal assets of underworld figures frozen since September, Minister tells parliament

Published

29 mins ago

2026/02/22

Thilina Walpola

Wijepala

Public Security and Parliamentary Affairs Minister Ananda Wijepala on Friday (20) disclosed in Parliament details of properties and assets allegedly acquired through illegal activities by suspects arrested in raids carried out since September last year.

The Minister made the disclosure in response to a question raised by MP Ravindra Bandara, stating that the identified assets have been frozen pending further investigations.

He said the assets include properties belonging to several alleged organised crime figures, among them Mandinu Padmasiri, alias ‘Kehelbaddara Padme’, who was arrested last year.

Listing the assets in the House, the Minister said Hapugoda Arachchige Kankanamge Duminda Dilruk has assets worth Rs. 23 million frozen, including a van, a motorcycle, a house and a roller gate.

In the case of Kandaiya Kalamogan, two motorboats have been identified, although their value has not yet been assessed.

Dilum Tharaka Balasuriya is reported to own a two-storey house situated on 15 perches of land with a face value of Rs. 800,000.

Assets belonging to Mohammad Harish Mohammad and Mohammad Shiyam were frozen on January 21, 2026. While the total value has not yet been assessed, five vehicles were confiscated from the former and a car from the latter.

Wijesuriya Mahaduruge Uditha Iroshan Wijesiri has assets valued at Rs. 5 million, including a lorry, while Indika Pathmakumara’s assets include a cab worth Rs. 2.5 million and a bank account containing Rs. 1 million.

Lahiru Sampath is reported to own a three-wheeler valued at Rs. 1.8 million.

According to the Minister, Hettiarachchige Dona Sriyani Chandralatha possesses a four-storey house and 14.7 perches of land valued at Rs. 60 million.

Mandinu Padmasiri, alias ‘Kehelbaddara Padme’, owns 20 perches of land with partially constructed buildings valued at Rs. 30 million and a half-finished six-room building worth Rs. 20 million, the Minister said.

Patabendi Maddumage Shehan Sathsara, alias ‘Dehi Bale Malli’, has five multi-day fishing trawlers valued at Rs. 200 million and a two-storey house with 15.8 perches of land worth Rs. 50 million.

The Minister further disclosed that Jayasinghege Maduranga Sampath owns a cab worth Rs. 5.4 million, a van valued at Rs. 14.5 million, five bank accounts containing Rs. 73.03 million, another account with Rs. 160,328.88 and USD 544, and Rs. 283 million in cash.

Adhikari Samantha Perera is reported to own 10.10 perches of land valued at Rs. 5 million and one acre and 1.5 perches of land worth Rs. 13 million.The Minister said investigations are continuing in respect of the suspects and the frozen assets.

News

Entire coal procurement rigged, SJB charges minister over substandard fuel

Published

30 mins ago

2026/02/22

Thilina Walpola

Marikkar

The entire coal procurement process was rigged, the main Opposition SJB alleged in Parliament on Friday, accusing Energy Minister Eng. Kumara Jayakody of misleading the Cabinet and the National Procurement Committee to favour a supplier of substandard coal for the Lakvijaya Coal Power Plant in Norochcholai.

Moving an adjournment debate on the energy crisis, SJB Colombo District MP S.M. Marikkar charged that the losses incurred from the importation of inferior coal must be fully computed and recovered from those responsible, including damage caused to machinery, additional power generation costs and environmental harm.

He said the SJB had exposed the issue both inside and outside Parliament, alleging that the Government was attempting to cover up large-scale irregularities in the 2026 coal procurement process.

Marikkar claimed that serious fraud, corruption and procedural violations had taken place from the outset. He pointed out that the standard 42-day procurement period had been curtailed to 21 days, thereby restricting competition and preventing many qualified companies from participating.

He further alleged that key eligibility criteria had been diluted, including the requirement that a supplier must have imported 500,000 metric tonnes of coal over the past three years. This threshold, he said, had been reduced to 100,000 metric tonnes to enable smaller firms to qualify.

According to the MP, despite instructions issued by the Committee on Public Finance and the Auditor General regarding the procurement process, the Minister had misled the Cabinet and the National Procurement Committee to deviate from the approved procedure in order to favour a particular company that subsequently supplied substandard coal.

Marikkar alleged that the first, third and fourth shipments had contained inferior coal, which had been mixed with existing higher-quality stocks and used at the Norochcholai plant. He said the resulting losses to the power generation system would far exceed the reported US$ 2 million fine imposed on the importer.

He also highlighted alleged irregularities in the tender process, claiming that the chairman of the tender board had withdrawn after decisions were taken and had failed to attend subsequent meetings.The MP further charged that the Government was attempting to justify impending power cuts by citing a purported shortage of coal.