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Sri Lanka: Why is the country in an economic crisis? Sri Lanka: Why is the country in an economic crisis?
(about 1 month later)
Sri Lankan Prime Minister Ranil Wickremesinghe has told the country's military to do "whatever is necessary to restore order", after protesters stormed his office. The International Monetary Fund is lending Sri Lanka $3bn (£2.4bn) to help it deal with its worst economic crisis in its history as an independent nation.
A state of emergency was declared after President Gotabaya Rajapaksa fled the country, following months of mass protests over the island's economic crisis. Soaring prices, shortages of essential goods and crippling international debts sparked nationwide protests last year which caused the president to flee the country.
What has been happening in Sri Lanka?What has been happening in Sri Lanka?
Protests started in the capital, Colombo, in April and spread across the country. In early 2022, Sri Lankans started experiencing power cuts and shortages of basics such as fuel. The rate of inflation rose to 50% a year.
People have been struggling with daily power cuts and shortages of basics such as fuel, food and medicines. As a result, protests broke out in the capital Colombo in April that year and spread across the country.
Inflation is running at more than 50%. The country ran short of fuel for essential services such as buses, trains and medical vehicles because it did not have enough reserves of foreign currency to import any more.
The country doesn't have enough fuel for essential services like buses, trains and medical vehicles, and officials say it doesn't have enough foreign currency to import more. The fuel shortage caused petrol and diesel prices to rise dramatically.
This lack of fuel has caused petrol and diesel prices to rise dramatically. In June last year, the government banned the sale of petrol and diesel for non-essential vehicles for two weeks. Sales of fuel remain severely restricted.
In late June, the government banned the sale of petrol and diesel for non-essential vehicles for two weeks. Sales of fuel remain severely restricted. Schools had to close, and people were asked to work from home to help conserve supplies.
Schools have closed, and people have been asked to work from home to help conserve supplies.
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Watch: Police fire tear gas at Sri Lanka protesters storming the prime minister's office
Watch: Police fire tear gas at Sri Lanka protesters storming the prime minister's office
Sri Lankan PM tells military to restore orderSri Lankan PM tells military to restore order
A dramatic day and moment of danger for Sri LankaA dramatic day and moment of danger for Sri Lanka
What happens when a country runs out of money?What happens when a country runs out of money?
Sri Lanka is unable to buy the goods it needs from abroad. Sri Lanka has been unable to buy goods it needs from abroad.
And in May it failed to make an interest payment on its foreign debt for the first time in its history. And in May 2022 it failed to make an interest payment on its foreign debt for the first time in its history.
Long queues for fuel - like this one in Colombo - have made normal life impossibleLong queues for fuel - like this one in Colombo - have made normal life impossible
Failure to pay debt interest can damage a country's reputation with investors, making it harder for it to borrow the money it needs on international markets. This damaged its reputation with lenders, making it even harder to borrow money on the international markets.
This can further harm confidence in its currency and economy.
What's the plan to tackle the crisis?What's the plan to tackle the crisis?
President Rajapaksa resigned after fleeing to Singapore. In the face of massive protests, President Gotabaya Rajapaksa resigned in June last year. Prime Minister Ranil Wickremesinghe became acting president and declared a nationwide state of emergency across the country.
Before stepping down he made Prime Minister Ranil Wickremesinghe acting president.
Mr Wickremesinghe declared a state of emergency across the country and imposed a curfew in the western province while he tries to stabilise the situation.
But, on Wednesday, hundreds of protesters stormed his office, amid calls for his resignation.
Mr Wickremesinghe has been prime minister six times, without seeing out a full term in officeMr Wickremesinghe has been prime minister six times, without seeing out a full term in office
The president's departure threatens a potential power vacuum in Sri Lanka. The mass protests have subsided, but the new president is trying to deal with a huge financial crisis.
It needs a functioning government to tackle the financial crisis. Sri Lanka owes about $7bn (£5.7bn) to China and around $1bn to India.
The country owes more than $51bn (£39bn) to foreign lenders, including $6.5bn to China, which has begun discussions about restructuring its loans. Last month, both these countries agreed to restructure their loans, giving Sri Lanka more time to repay them.
The G7 group of countries - Canada, France, Germany, Italy, Japan, UK and the US - had said it supports Sri Lanka's attempts to reduce its debt repayments. Thanks to this, the International Monetary Fund (IMF) has agreed to lend Sri Lanka $3bn. That is on top of a $600m loan that the World Bank made last year.
The World Bank has agreed to lend Sri Lanka $600m, and India has offered at least $1.9bn. Sri Lanka's government says it will raise funds to repay its debts by restructuring state-owned enterprises and privatising the national airline.
The International Monetary Fund (IMF) is discussing a possible $3bn (£2.5bn) loan.
But it would require a stable government that could raise interest rates and taxes to help fund the deal, so any bailout may be delayed until a new administration is in place.
Banging dishes together to protest at the food price hikes.Banging dishes together to protest at the food price hikes.
Mr Wickremesinghe had already said the government would print money to pay employees' salaries, but warned this would be likely to boost inflation and lead to further price hikes. In early 2023 the country introduced income taxes for higher earners, ranging from 12.5% to more than 36%.
He also said state-owned Sri Lankan Airlines could be privatised. It also raised other taxes to pay for critical purchases, including fuel and food.
The country has asked Russia and Qatar to supply it with oil at low prices to help reduce the cost of petrol.
What led to the economic crisis?What led to the economic crisis?
The government blamed the Covid pandemic, which badly affected Sri Lanka's tourist trade - one of its biggest foreign currency earners.The government blamed the Covid pandemic, which badly affected Sri Lanka's tourist trade - one of its biggest foreign currency earners.
It also says tourists were frightened off by a series of deadly bomb attacks in 2019. It also said tourists were frightened off by a series of deadly bomb attacks in 2019.
However, many experts blame President Rajapaksa's poor economic mismanagement. However, many experts blame Mr Rajapaksa's economic policies.
Mr Rajapaksa's departure ends a family dynasty that has dominated Sri Lanka's politics for the past two decadesMr Rajapaksa's departure ends a family dynasty that has dominated Sri Lanka's politics for the past two decades
At the end of its civil war in 2009, Sri Lanka chose to focus on providing goods to its domestic market, instead of trying to boost foreign trade.At the end of its civil war in 2009, Sri Lanka chose to focus on providing goods to its domestic market, instead of trying to boost foreign trade.
This meant its income from exports to other countries remained low, while the bill for imports kept growing.This meant its income from exports to other countries remained low, while the bill for imports kept growing.
Sri Lanka now imports $3bn (£2.3bn) more than it exports every year, and that is why it has run out of foreign currency. Sri Lanka now imports $3bn more than it exports every year, and that is why it ran out of foreign currency.
At the end of 2019, Sri Lanka had $7.6bn (£5.8bn) in foreign currency reserves, which have dropped to around $250m (£210m). At the end of 2019, Sri Lanka had $7.6bn in foreign currency reserves, which have dropped to around $250m.
Mr Rajapaksa was also criticised for big tax cuts he introduced in 2019, which lost the government income of more than $1.4bn (£1.13bn) a year. Mr Rajapaksa also introduced big tax cuts in 2019, which lost the government more than $1.4bn a year in revenues.
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The switch to organic fertilisers resulted in widespread crop failure, exacerbating foreign currency shortagesThe switch to organic fertilisers resulted in widespread crop failure, exacerbating foreign currency shortages
When Sri Lanka's foreign currency shortages became a serious problem in early 2021, the government tried to limit them by banning imports of chemical fertiliser. When Sri Lanka's foreign currency shortages became a serious problem in early 2021, its government tried to tackle the issue by banning imports of chemical fertilisers.
It told farmers to use locally sourced organic fertilisers instead. It told farmers to use locally sourced organic fertilisers, instead.
This led to widespread crop failure. Sri Lanka had to supplement its food stocks from abroad, which made its foreign currency shortage even worse. This led to widespread crop failures. Sri Lanka had to supplement its food stocks from abroad, which made its foreign currency shortage even worse.
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