Written by Anaisa Arora, a grade 10 student.

Sri Lanka is facing a severe economic crisis and a state of emergency has been declared.

The situation is so bad that people are standing in lines for hours just to get basic supplies. There have been severe power cuts and shortages of food, fuel, and medicines.

People are out on the streets and police are using tear gas to control crowds that are demanding that the government resign.

Why is all this happening?

First, let’s quickly understand what’s an economic crisis?

Before understanding what an economic crisis means, let’s understand what economy means.

Economy, put simply, is the “state of a country in terms of the production and consumption of goods and services and the supply of money.”

Ok, so back to what’s an economic crisis…

When a country’s economy goes down sharply – it’s said to face an economic crisis. A few things happen in an economic crisis – a country’s production of goods and products goes down and that has a negative impact on many things – there’s a shortage of supplies and goods (including essential things like food), prices go up, power is cut, jobs are lost, etc.

Why did this happen in Sri Lanka?

Basically, it’s mismanagement by the country’s leaders, which is why there have been protests taking place for months, as people are angry and are out on the streets.

Over the years governments have taken decisions that have led to, what’s called, a twin deficit situation – which happens when a country’s national expenditure exceeds its national income, and when its production of goods and services is not enough.

And this..foreign debt…

One of the main issues that caused this crisis is the fact that Sri Lanka is in big debt – meaning that the country has borrowed billions of dollars from foreign banks and now it can’t give it back.

This year, some USD 4 billion is supposed to be repaid and the country does not have the money.

In more detail – what led to the economic recession

According to analysts, the crisis has been years in the making, fueled by a mix of misfortune (like COVID), and government incompetence.

The Sri Lankan government has borrowed massive amounts of money from international creditors to finance public services during the last decade. This borrowing has coincided with a succession of blows to the Sri Lankan economy – from natural calamities (heavy monsoons) to man-made catastrophes (a government ban on chemical fertilizers, which was disastrous for farmers’ harvests).

Faced with a massive deficit, President Gotabaya Rajapaksa decreased taxes in an attempt to boost the economy. However, the strategy backfired, resulting in a reduction in government revenue. As a result, rating agencies downgraded Sri Lanka to near-default status, blocking off the country’s access to international markets.

To pay off government debt, Sri Lanka has to rely on its foreign exchange reserves, which fell from $6.9 billion in 2018 to $2.2 billion this year. Imports of petroleum and other commodities were hampered as a result, and prices skyrocketed.

Also, the SRI Lankan Rupee’s value fell, versus the US dollar, which made matters worse for the average Sri Lankans.

What does this mean for the people?

The crisis has converted Sri Lankans’ everyday life into a never-ending cycle of having to queue for basic necessities, many of which are rationed. 

Shops have been forced to close in recent weeks due to a lack of power to run refrigerators, air conditioning units, or fans. Customers wait for hours in the sweltering heat to fill their tanks, and soldiers are posted at gas stations to maintain their calm. And living is made even more regular power outages that throw Colombo in the dark for more than ten hours at a stretch – because the country cannot pay for fuel imports.

What is the status of the protests?

Late in March, protesters in Colombo flocked to the street.

Demonstrators threw stones and set fires outside the President’s private house on March 31, igniting public outrage and discontent. After breaking up the protesters with tear gas and water cannons, police imposed a 36-hour curfew.

On April 1, President Rajapaksa proclaimed a statewide state of emergency, empowering officials to arrest anyone without a warrant and censoring social media services. Despite the curfew, protests continued the next day, causing police to arrest hundreds more participants. Protests have persisted in recent days, though they have remained mostly nonviolent. Crowds of student demonstrators encircled Rajapaksa’s apartment again on Tuesday night, demanding his resignation. On April 5, the emergency ordinance was rescinded (cancelled), but now it’s back.

Sri Lanka’s future

Sri Lanka is presently appealing for financial aid from the International Monetary Fund (IMF), a US-based international financial institution, headquartered, consisting of 190 countries.

There is still a degree of ambiguity about what will happen next. Last month Sri Lanka announced it was defaulting on its $51 billion foreign debt. It needs an urgent flush of money to stay afloat, but there is no certainty where that will come from.

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