An economic crisis, the worst of its kind is what Sri Lanka is facing. Devastating conditions, with prices soaring and even the cost of daily commodities reaching the sky are plaguing the local public, causing a catastrophe kind of situation on the ground. In this article, we explore what led to this crisis, what’s happening right now and what is being done to salvage the situation.

Why is Sri Lanka in a crisis situation?

Debt. When the COVID 19 pandemic struck, the island’s future started to look bleak. This is because tourism which was a major source of income was now halted and thus the dollars that came in were no longer coming in, leading to a dip in the foreign reserves of the country and thus the inability to import basic necessities such as medicines and food. Recognising this, the Government decided to do what it could by imposing a ban on imports. This move would essentially save foreign currency. But along with this what it also did was cause a shortage of food in the country, and thus inflation of a record 17.5 per cent was seen. With lessened imports, the manufacturing processes of the island were interrupted, and thus were exports.

Kopalapillai Amirthalingam, professor of economics at the University of Colombo said to The Week “When imports are stopped, how can we ensure quality in exports? Sri Lanka depends on imports for raw materials.” He also added “The foreign exchange crisis has become an existential threat. An even bigger problem is borrowing. We have borrowed to invest unproductively, like the Hambantota port and the Ceylon Electricity Company,” highlighting unwise investments made by the Gotabaya Government.

The Central Bank of Sri Lanka’s foreign exchange reserves dwindled and consumer prices rose by 15% since February.

What is the debt that the island is in?

Sri Lanka’s reserves dipped to $2.31 billion as of the end of February. This figure was down around 70 per cent from two years ago. The country has $11.8 billion worth of debt through sovereign bonds (ISB). This makes up 36.4 per cent of its external debt. While the list of the number of debtors is long, China is fourth in place. Having lent Sri Lanka $5 billion in the last decade for various projects, the repayments to China are now said to be as much as $400-$500 million.

Experts are suggesting a way out of this debt by asking Sri Lanka to have a three-year payment structure in place. Now along with the debt that the country needs to meet, there is also the situation of managing the crisis, by seeing to it that people have basic essentials to survive and money is needed for this.

What was the effect of inflation in Sri Lanka?

With the levels of inflation skyrocketing as they were, devastating effects were witnessed on the island. Electricity cuts that went on for hours, no fuel to power generators, shortage of basic necessities, people lining up in queues to buy petrol, and even losing their lives in the process, and life coming to a standstill. Even examinations that were being held in schools across the island had to be stopped. "School principals cannot hold the tests as printers are unable to secure foreign exchange to import necessary paper and ink," the department of education of the Western Province stated on 20 March.

Along with all of this, there is the issue of a massive exodus.

What does the Sri Lanka exodus mean?

People are finding that conditions in the country are uninhabitable and are thus looking for a way out. Intelligence officers in the Indian state of Tamil Nadu have predicted that around 2,000 refugees are expected to arrive in India from the island. Suresh Premachandran, who heads Sri Lanka‘s political outfit Eelam People’s Revolutionary Liberation Front, said “Construction workers and daily wagers are struggling due to inflation across the country…More people are likely to leave the country unless the economy stabilises.”

With more people deciding to move out of the country, India becomes a favorable spot for them to head towards.

India’s ties with Sri Lanka

The relations between the two nations have always been solid with the former helping the latter many a time. Help of $2.4 billion since January, a $500-million loan deferment for two months, and a $1-billion credit line that Sri Lanka signed with India which helped it with the procurement of essentials, go to show India has extended a hand to the island. The question now remains if India can widen its help by offering a safe space for the people who have left the island.

Tamil Nadu Chief Minister M K Stalin has said in a statement that he has seemed advice from the Centre on how to handle the refugees who are now flocking to its shores.