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Hewison Insights

Blog | Sri Lanka’s worst economic crisis in 70 years

Alison Dellow
Wealth Adviser
14 Apr 2022

We are travelling a little further from home today. 

Sri Lanka, an island nation of 22 million has descended into its worst financial crisis since independence in 1948, with food, fuel, medicine and electricity becoming increasingly scarce. How did this happen? This crisis has been years in the making resulting from mismanaged government finances with a series of devastating events. 

Over the last decade, the Sri Lankan government borrowed vast sums of money from foreign lenders to fund public services. These increased borrowings had coincided with a series of blows to the Sri Lankan economy, both natural disasters such as heavy monsoons and human-made catastrophes including the government ban on chemical fertilisers that destroyed farmer’s harvests. These problems were compounded by tourism being decimated in 2019 after the Easter Bombings occurred and again in 2020 when the world learned about COVID-19. 

President Gotabaya Rajapaksa tried to stimulate the economy by cutting taxes and printing money. However, this contributed to price rises and a large Government debt bill. That made foreign investors less willing to invest in the country and the Government is now at risk of ‘defaulting’ on its debt.

The Government has tried to hold on to what little foreign currency it has left by restricting imports, including on food and medicine but this has again accelerated price rises. President Rajapaksa has previously resisted asking global financial institutions for assistance, relying mainly on foreign aid from India and China but it has now asked for a loan from the International Monetary Fund (IMF). 

The country’s foreign exchange reserves have fallen by 70% in the last 2 years, leaving it struggling to pay for essential imports including food and fuel. This has forced basic essentials, even locally produced essentials to become unaffordable for many. The crisis has also pushed the country’s free healthcare system to the brink. About 85% of its pharmaceuticals are imported, this not only includes medicine but also equipment such as anaesthetics and gloves are running low.  

Over a week ago, the Sri Lankan Government imposed a curfew in response to protests in several cities. The protests that are ongoing and increasing are over the Government’s handling of a severe economic crisis.  At the time of writing, all 26 ministers in the Sri Lankan Cabinet have resigned however President Gotabaya Rajapaksa, and his brother Prime Minster Mahinda Rajapaksa have not.  

It is clear that this crisis is both economic and political. Economists suggest that the government mismanagement is partly to blame but the leaders of the nation can’t agree to on how to move forward.  

It is incredibly sad to see what is unfolding in the tiny yet might island nation. A nation that is known for its surf beaches, rich culture and delicious, heart-warming foods has been completely decimated. Unfortunately, the consequences of this all hit those that can’t afford it the most.