HOW DID IT COME TO THIS?
Analysts say that economic mismanagement by successive governments has weakened Sri Lanka’s public finances, leaving national expenditure in excess of income and the production of tradable goods and services at inadequate levels.
The problem was exacerbated by deep tax slashes enacted by the Rajapaksa government soon after it took office within 2019. Months afterwards, the COVID-19 outbreak struck.
That wiped out much of Sri Lanka’s revenue foundation, most notably from the lucrative tourism industry, while remittances from nationals working abroad decreased and were more sapped by a good inflexible foreign exchange price.
Rating firms, concerned about government budget and its inability to repay large foreign financial debt, downgraded Sri Lanka’s credit ratings from 2020 onwards, eventually fastening the country out of worldwide financial markets.
To keep the economic climate afloat, the government bent heavily on the foreign exchange reserves, eroding them by over 70 per cent within two years.
The crisis has crippled Sri Lanka, once seen as an model for a building economy. Fuel shortages have led to long queues at filling stations as well as frequent blackouts, and hospitals have run in short supply of medicine.
Runaway inflation reached fifty four. 6 per cent final month and could increase to 70 percent, the central financial institution has said.
EXACTLY WHAT DID THE GOVERNMENT DO?
Despite the quickly deteriorating economic environment, the particular Rajapaksa government initially held off discussions with the IMF.
For months, opposition commanders and some financial specialists urged the government to behave, but it held the ground, hoping that will tourism would recover and remittances would recover.
Eventually, aware of the range of the brewing problems, the government did seek help from nations including India plus China, regional superpowers that have traditionally jostled for influence within the strategically located island.
India has prolonged billions of dollars in loans to help pay for vital supplies. In all, New Delhi says it has provided assistance worth more than US$3. 5 billion this year.
China provides intervened less publicly but said this supports efforts for your island nation in order to restructure its debt.
Earlier in 2022, Rajapaksa inquired China to restructure repayments on about US$3. 5 billion of debt due to Beijing, which late 2021 furthermore provided Sri Lanka with an US$1. 5 billion dollars yuan-denominated swap.
Sri Lanka eventually opened talks with the IMF.