Sri Lanka is currently facing its worst economic crisis. This has caused high prices and fuel shortages throughout the country.

The Sri Lankan rupee fell by nearly 45% since March 1st, and its foreign currency reserves have plunged to crisis levels.

Sri Lanka imports many essential items but is unable to pay for them. This has led to shortages of fuel, food, and baby milk.

The country was heavily dependent on borrowing from China. while this may have been beneficial in the short-term, it is now at the brink of defaulting on its sovereign debt.

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Fuel crisis plugged by Power cut

Protests have erupted across the country because of the economic crisis.

February saw an increase in essential food inflation of 25%, and overall inflation close to 18%. People have had to wait for hours to purchase fuel due to rocketing prices, which has led to a rise in fuel costs.

The Ministry of Power declared a 6- to 7-hour power cut throughout the country. Supplies for buses and lorries were also rationed.

World oil prices have risen due to the war in Ukraine, making it more difficult for Sri Lankans to purchase.

Why is there a crisis?

For decades, successive governments have not addressed Sri Lanka’s deep-rooted financial crisis.

Instead of confronting the problem head-on, it chose to borrow money to solve its problems. It now has mounting debt and interest payments totaling almost $12 billion.

It is expected to make $4 billion in such payments this year, further depleting its reserves.

Tourism is a major industry that generates over $4 billion annually. However, the pandemic has made it difficult for the industry to recover.

Rajapaksa’s reckless and poorly managed economic policies have exaggerated the crisis, and are to blame for the current state of affairs in the country.

The structural deficiencies in the government’s economic policies were exposed by tax cuts, import restrictions, and a reluctance of prudent economic reforms.

International agencies have downgraded the country due to a severe balance payment crisis. This further hinders foreign investment opportunities.

The country is stuck in a “debt trap”

Sri Lanka has asked China for help with credit restructuring and debt payments.

To import essentials, the government requested a $1.5 billion credit line from India. This is in addition the $1 billion India extended last month.

The country will seek assistance from the International Monetary Fund, (IMF), and other countries.

The current deficit is so large that loans may not be enough to cover the balance of payments.

For the moment, however, ordinary Sri Lankans will be the ones who have to deal with skyrocketing costs and shortages in essential products.