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News Explainer: The Economic Crisis in Sri Lanka
Explained: the Economic Crisis in Sri Lanka
Sri Lanka is currently in an economic and political crisis of mass proportions, recently culminating in a default on its debt payments. The country is also nearly at empty on their foreign currency reserves, decreasing the ability to purchase imports and driving up domestic prices for goods.
There are several reasons for this crisis and the economic turmoil has sparked mass protests and violence across the country. This visual breaks down some of the elements that led to Sri Lanka’s current situation.
A Timeline of Events
The ongoing problems in Sri Lanka have bubbled up after years of economic mismanagement. Here’s a brief timeline looking at just some of the recent factors.
2009
In 2009, a decades-long civil war in the country ended and the government’s focus turned inward towards domestic production. However, a stress on local production and sales, instead of exports, increased the reliance on foreign goods.
2019
Unprompted cuts were introduced on income tax in 2019, leading to significant losses in government revenue, draining an already cash-strapped country.
2020
The COVID-19 pandemic hit the world causing border closures globally and stifling one of Sri Lanka’s most lucrative industries. Prior to the pandemic, in 2018, tourism contributed nearly 5% of the country’s GDP and generated over 388,000 jobs. In 2020, tourism’s share of GDP had dropped to 0.8%, with over 40,000 jobs lost to that point.
2021
Recently, the Sri Lankan government introduced a ban on foreign-made chemical fertilizers. The ban was meant to counter the depletion of the country’s foreign currency reserves.
However, with only local, organic fertilizers available to farmers, a massive crop failure occurred and Sri Lankans were subsequently forced to rely even more heavily on imports, further depleting reserves.
April 2022
In early April this year, massive protests calling for President Gotabaya Rajapaksa’s resignation, sparked in Sri Lanka’s capital city, Colombo.
May 2022
In May, pro-government supporters brutally attacked protesters. Subsequently, Prime Minister Mahinda Rajapaksa, brother of President Rajapaksa, stepped down and was replaced with former PM, Ranil Wickremesinghe.
June 2022
Recently, the government approved a four-day work week to allow citizens an extra day to grow food, as prices continue to shoot up. Food inflation increased over 57% in May.
Additionally, the increasing prices on grain caused by the war in Ukraine and rising fuel prices globally have played into an already dire situation in Sri Lanka.
The Key Information
“Our economy has completely collapsed.”
Prime minister Ranil Wickremesinghe to Parliament last week.
One of the main causes of the economic crisis in Sri Lanka is the reliance on imports and the amount spent on them. Let’s take a look at the numbers:
- 2021 total imports = $20.6 billion USD
- 2022 total imports (to March) = $5.7 billion USD
In contrast, the most recent reported foreign currency reserve levels in the country were at an abysmal $50 million, having plummeted an astounding 99%, from $7.6 billion in 2019.
Some of the top imports in 2021, according to the country’s central bank were:
- Refined petroleum = $2.8 billion
- Textiles = $3.1 billion
- Chemical products = $1.1 billion
- Food & beverage = $1.7 billion
Of course, without the cash to purchase these goods from abroad, Sri Lankans face an increasingly drastic situation.
Additionally, the debt Sri Lanka has incurred is huge, further hampering their ability to boost their reserves. Recently, they defaulted on a $78 million loan from international creditors, and in total, they’ve borrowed $50.7 billion.
The largest source of their debt is by far due to market borrowings, followed closely by loans taken from the Asian Development Bank, China, and Japan, among others.
What it Means
Sri Lanka is home to more than 22 million people who are rapidly losing the ability to purchase everyday goods. Consumer inflation reached 39% at the end of May.
Due to power outages meant to save energy and fuel, schools are currently shuttered and children have nowhere to go during the day. Protesters calling for the president’s resignation have been camped in the capital for months, facing tear gas from police and backlash from president Rajapaksa’s supporters, but many have also responded violently to pushback.
India and China have agreed to send help to the country and the the International Monetary Fund recently arrived in the country to discuss a bailout. Additionally, the government has sent ministers to Russia to discuss a deal for discounted oil imports.
A Foreshadowing for Low Income Countries
Governments need foreign currency in order to purchase goods from abroad. Without the ability to purchase or borrow foreign currency, the Sri Lankan government cannot buy desperately needed imports, including food staples and fuel, causing domestic prices to rise.
Furthermore, defaults on loan payments discourage foreign direct investment and devalue the national currency, making future borrowing more difficult.
What’s happening in Sri Lanka may be an ominous preview of what’s to come in other low and middle-income countries, as the risk of debt distress continues to rise globally.
The Debt Service Suspension Initiative (DSSI) was implemented by G20 countries, suspending nearly $13 billion in debt from the start of the pandemic until late 2021.
Some DSSI and LIC countries facing a high risk of debt distress include Zambia, Ethiopia, and Tajikistan, to name a few.
Going forward, Sri Lanka’s next steps in managing this situation will either serve as a useful example for other countries at risk or a warning worth heeding.
Ongoing Updates
Since this article was published the situation has changed significantly in Sri Lanka. Protesters have received their original demand calling for president Rajapaksa to step down — both he and prime minister Wickremesinghe have agreed to resign. This comes after protesters stormed the president’s palace causing him to flee the country.
Note: The debt breakdown in the main visualization represents total outstanding external debt owed to foreign creditors rather total debt.
Markets
Visualizing Global Inflation Forecasts (2024-2026)
Here are IMF forecasts for global inflation rates up to 2026, highlighting a slow descent of price pressures amid resilient global growth.
Visualizing Global Inflation Forecasts (2024-2026)
Global inflation rates are gradually descending, but progress has been slow.
Today, the big question is if inflation will decline far enough to trigger easing monetary policy. So far, the Federal Reserve has held rates for nine months amid stronger than expected core inflation, which excludes volatile energy and food prices.
Yet looking further ahead, inflation forecasts from the International Monetary Fund (IMF) suggest that inflation will decline as price pressures ease, but the path of disinflation is not without its unknown risks.
This graphic shows global inflation forecasts, based on data from the April 2024 IMF World Economic Outlook.
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The IMF’s Inflation Outlook
Below, we show the IMF’s latest projections for global inflation rates through to 2026:
Year | Global Inflation Rate (%) | Advanced Economies Inflation Rate (%) | Emerging Market and Developing Economies Inflation Rate (%) |
---|---|---|---|
2019 | 3.5 | 1.4 | 5.1 |
2020 | 3.2 | 0.7 | 5.2 |
2021 | 4.7 | 3.1 | 5.9 |
2022 | 8.7 | 7.3 | 9.8 |
2023 | 6.8 | 4.6 | 8.3 |
2024 | 5.9 | 2.6 | 8.3 |
2025 | 4.5 | 2.0 | 6.2 |
2026 | 3.7 | 2.0 | 4.9 |
After hitting a peak of 8.7% in 2022, global inflation is projected to fall to 5.9% in 2024, reflecting promising inflation trends amid resilient global growth.
While inflation has largely declined due to falling energy and goods prices, persistently high services inflation poses challenges to mitigating price pressures. In addition, the IMF highlights the potential risk of an escalating conflict in the Middle East, which could lead to energy price shocks and higher shipping costs.
These developments could negatively affect inflation scenarios and prompt central banks to adopt tighter monetary policies. Overall, by 2026, global inflation is anticipated to decline to 3.7%—still notably above the 2% target set by several major economies.
Adding to this, we can see divergences in the path of inflation between advanced and emerging economies. While affluent nations are forecast to see inflation edge closer to the 2% target by 2026, emerging economies are projected to have inflation rates reach 4.9%—falling closer to their pre-pandemic averages.
Get the Full Analysis of the IMF’s Outlook on VC+
This visual is part of an exclusive special dispatch for VC+ members which breaks down the key takeaways from the IMF’s 2024 World Economic Outlook.
For the full set of charts and analysis, sign up for VC+.
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