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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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Development projects can deliver results to the people more quickly when the political authority and the public service work together towards a common goal – PM

Published

12 mins ago

2026/09/20

Priyan

Prime Minister Dr. Harini Amarasuriya stated that development projects can deliver results to the people more quickly when the political authority and the public service work together towards a common, people-oriented objective.

The Prime Minister made these remarks while participating in a discussion held on Friday [September 18] at the Western Province Council Auditorium to review the progress of the development project to rehabilitate Rathmalana Kandawala Road and the drainage system on either side of the road, within the Dehiwala–Mount Lavinia Municipal Council limits in the Colombo District.

The project, which commenced on September 10, 2026, is scheduled to be completed before June 30, 2027. Implemented by the Provincial Road Development Authority (PRDA), the project includes the construction of a bridge at a cost of Rs. 64 million, the rehabilitation of the drainage system at a cost of Rs. 930 million, and the rehabilitation of the road at a cost of Rs. 115 million.

The Prime Minister also paid special attention to the progress of the responsibilities assigned to the Western Province Council, the Irrigation Department and the Ratmalana Divisional Secretariat in accordance with decisions taken at the previous committee meeting. Attention was also given to the current status of the plans being carried out by the Sri Lanka Land Development Corporation (SLLRDC), as well as the construction and maintenance activities being undertaken by the Provincial Road Development Authority (PRDA).

Commending the expedite and commendable progress of the project, the Prime Minister particularly appreciated the commitment demonstrated by officials of the relevant government institutions to work in close coordination with one another and in collaboration with the political authority.

The Prime Minister also emphasised the importance of taking measures well in advance to control flooding and minimise its impact on Colombo and several other districts in view of the rainy weather that may affect the Western Province during the latter part of this year.

The meeting was attended by the Chairman of the Colombo District Coordinating Committee and Member of Parliament Lakshman Nipuna Arachchi, Chairperson of the Ratmalana Divisional Coordinating Committee and Member of Parliament Samanmalee Gunasinghe, Chairman of the Roads Sub-Committee of the Colombo District Coordinating Committee Dewananda Suraweera, Mayor of the Dehiwala–Mount Lavinia Municipal Council Parakum Shantha, Chief Secretary of the Western Province K.G. Pradeep Pushpakumara, along with a number of government officials.

[Prime Minister’s Media Division]

News

Landslide Early Warnings issued to the Districts of Colombo, Galle, Kalutara, Kandy, Kegalle, Matara, Nuwara Eliya and Ratnapura

Published

59 mins ago

2026/09/20

Priyan

The National Buliding Research Organization has issued Landslide Early Warnings to the Districts of Colombo, Galle, Kalutara, Kandy, Kegalle, Matara, Nuwara Eliya and Ratnapura from 10:00 hrs on 20.09.2026 To 10:00 hrs on 21.09.2026

Accordingly,

LEVEL II (AMBER) landslide early warnings have been issued to the Divisional Secretaries Divisions and surrounding areas of Nagoda and Neluwa in the Galle district, Pasbage Korale in the Kandy district, Dehiowita and Yatiyanthota in the Kegalle district, Pitabeddara in the Matara district, Kotmale, Ambagamuwa and Norwood in the Nuwara Eliya district and Ayagama, Pelmadulla, Ratnapura and Eheliyagoda in the Ratnapura district.

LEVEL I (YELLOW) landslide early warnings have been issued to the Divisional Secretaries Divisions and surrounding areas of Seethawaka in the Colombo district, Palinda Nuwara and Bulathsinhala in the Kalutara district, Ganga Ihala Korale in the Kandy district, Deraniyagala in the Kegalle district, Kotapola in the Matara district and Ratnapura, Kalawana, Kuruwita and
Elapatha in the Ratnapura district.

News

Namal Rajapaksa Buddhist gambit fails, bail denied

Published

8 hours ago

2026/09/20

Thilina Walpola

MONETABRIEF – Namal Rajapaksa, son of Sri Lanka’s former leader Mahinda Rajapaksa, was denied bail by the Colombo chief magistrate despite pleading that he needed to attend important Buddhist rituals and travel to India.

The 40-year-old opposition MP’s lawyer, Shavindra Fernando, told the court that Namal had been invited to take part in a pinnacle-capping ceremony at the Pothgul Vihara temple on September 26.

“If my client fails to attend this event, it should be regarded as a disrespect shown to the chief incumbent of the temple,” Fernando said.

He added that Namal had also received an invitation to visit India from 27 September to 1 October and therefore sought bail.

However, he was remanded until September 29 in connection with allegations that he received kickbacks of $800,000 from the $2.3 billion Airbus aircraft purchase deal his father – Mahinda Rajapaksa – approved as president in 2013.

Deputy Solicitor General Janaka Bandara invoked the Buddha’s teachings in response to Namal’s lawyer, Fernando, saying that a judicial matter was far more important than attending a religious ceremony.

“According to what is being said here, the accused himself should have considered this while conducting dealings with Nimal Perera,” Bandara said, referring to the businessman who allegedly routed the bribe money to Namal.

Bandara quoted at length from a recent Supreme Court decision that expanded on the Buddha’s teachings, noting that when a ruler is righteous, the people follow; but when the ruler is dishonest, the citizenry follows that example too.

The 40-year-old MP was arrested on 4 September under the new anti-graft legislation parliament adopted unanimously in 2023.

Namal is primarily accused of accepting $800,000 out of a 1.4 euro million bribe that the then SriLankan Airlines chief executive, Kapila Chandrasena, is alleged to have received from Airbus after finalising a $2.3 billion purchase of aircraft in 2013.

Magistrate Asanga S. Bodaragama told the previous court hearing that he did not have the power to grant Namal bail because the Director-General of the Commission to Investigate Allegations of Bribery or Corruption (CIABOC) had issued a certificate under section 149 of the Act.

The provision stipulates that a magistrate may not grant bail when the CIABOC DG presents a certificate confirming that an offence under the Act has been committed.

The magistrate noted that he could grant bail only in “exceptional circumstances”, but there was no acceptable argument from the defence for him to do so.

A Buddhist temple festival and an invitation from India could not be considered good enough reasons to grant bail.

The businessman who acted as a conduit for the bribe – Nimal Perera – had turned state witness, providing details of how the money was given to Namal through two bank transfers in 2014 and 2015, the court was told.

Under the provisions of the August 2023 Act, Namal Rajapaksa could be held in custody until the conclusion of the trial, even though the magistrate remanded him until September 18, the maximum he could be incarcerated at a time.