What is the current state of the Sri Lankan economy which has been facing headwinds since the Covid-19 outbreak?

Roots of the crisis lie in economic mismanagement by successive governments in Colombo. But the current crisis was accelerated by deep tax cuts promised by Prime Minister Mahindra Rajapaksa during a 2019 election campaign that were enacted months before the pandemic. With the country’s lucrative tourism industry and foreign workers’ remittances sapped by the pandemic, credit ratings agencies downgraded Sri Lanka and effectively locked it out of international capital markets. Foreign exchange reserves plummeted by almost 70% in two years. As of February, the country was left with only $2.31 billion in its reserves but faces debt repayments of $7 billion in 2022. The Rajapaksa government’s decision to ban all chemical fertilisers in 2021, a move that was later reversed, also hit the country’s farm sector, and triggered a drop in the critical rice crop.

What next for the Rajapaksa regime?

The economic hardships are translating into massive anger against the Rajapaksa family that dominates the government. Deep anger is palpable in its core constituency of farmers and nationalists. Hardline JVP is trying to encash on this, and ET has learnt that certain ministers and coalition partners have expressed displeasure over the situation. This may lead to a change of guard if the crisis is not addressed immediately. Former president Maithripala Sirisena’s Freedom Party has called on president Rajapaksa to form an all-partygovernment to tide over the crisis and said it may leave the alliance if its request is ignored.

Why was the emergency proclaimed by President Gotabaya?

A severe shortage of foreign currency has left the government unable to pay for essential imports, including fuel, leading to debilitating power cuts lasting up to 13 hours. People are dealing with shortages of fuel and medicines, and soaring inflation. The country steeply devalued its currency last month ahead of talks with the International Monetary Fund (IMF) for a loan programme. Diesel shortage across the island has crippled public transport and goods movement. President Rajapaksa declared a state of emergency on Friday, giving sweeping powers to security forces, a day after as hundreds of protesters clashed with police for several hours and tried to storm his house in anger over the unprecedented economic crisis.

Who has come to Sri Lanka’s rescue?

The IMF will initiate discussions with Sri Lankan authorities on a possible loan programme in “coming days”. Rajapaksa has also sought help from China and India, particularly for fuel and foodgrains. A diesel shipment under a $500-million credit line signed with India in February arrived in Colombo on Saturday. Sri Lanka and India have signed a $1-billion credit line. Essentials including medicine and rice have been supplied under that so far. India has so far extended support of over $ 2.5 billion in soft loans and under currency swap arrangement. China has pushed refinancing to Lanka to repay its debts. India may extend additional humanitarian support if the situation warrants.