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Sri Lanka: Why is the country in an economic crisis? Sri Lanka: Why is the country in an economic crisis?
(2 days later)
Police take away a man injured in protests outside the president's office in ColomboPolice take away a man injured in protests outside the president's office in Colombo
Sri Lanka's new prime minister has announced measures to tackle the island nation's worst economic crisis since independence from Britain in 1948. Sri Lanka has defaulted on a multi-million pound foreign debt payment, deepening the nation's worst economic crisis since it gained independence in 1948.
Ranil Wickremesinghe has said the country's economic problems will get worse before they get better, and appealed for outside financial help. The new prime minister, Ranil Wickremesinghe, is appealing for foreign help to bail out the government, which has almost run out of foreign currency reserves..
Violent protests led to the resignation of former prime minister, Mahinda Rajapaksa, and other members of the government. Sri Lanka has seen weeks of protests because of rising food prices and acute shortages of fuel.
Why have people taken to the streets? Why did Sri Lanka default on its debt?
Protests over rising prices and shortages erupted in early April in the capital, Colombo, and spread across the country. Sri Lanka's government has failed to pay $78m (£63m) in debt interest payments, causing two of the world's biggest credit rating agencies to declare it had defaulted.
Food prices started rising in late 2021, and people are now paying up to 30% more for food than a year ago. This has forced many people to skip meals. A default can seriously damage investors' confidence in a country, making it harder for it to borrow money on international markets and threatening the value of its currency.
There have also been fuel shortages and power cuts, and a lack of medicines has brought the health system to the verge of collapse. Sri Lanka owes $50bn (£40bn) to foreign creditors but says it cannot pay them. It is asking for a loan from the International Monetary Fund (IMF).
Prime Minister Wickremesinghe has said the nation also urgently needs $75m (£60.8m) of foreign currency in the next few days to pay for essential imports such as fuel.
How is this affecting people?
For months, Sri Lanka has lacked the foreign currency to buy all that it needs from abroad. Shortages of food and fuel have caused prices to soar. Inflation is now running at 30%.
There have been power cuts, and a lack of medicines has brought the health system to the verge of collapse.
People started protesting out on the streets of the capital, Colombo ,in early April and the protests have spread across the rest of the island.
Why is Sri Lanka's economy in crisis?Why is Sri Lanka's economy in crisis?
Sri Lanka's foreign currency reserves have virtually run dry, and as it heavily reliant on imports, it can no longer afford to pay for staple foods and fuel. Sri Lanka's foreign currency reserves have virtually run dry, and it can no longer afford to pay for imports of staple foods and fuel.
The government blames the Covid pandemic, which 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 on churches in 2019. The government blames the Covid pandemic, which affected Sri Lanka's tourist trade - one of its biggest foreign currency earners. It also says tourists have been frightened off by a series of deadly bomb attacks on churches in 2019.
However, many experts say economic mismanagement is to blame.However, many experts say economic mismanagement is to blame.
How Sri Lanka's war heroes became villainsHow Sri Lanka's war heroes became villains
Much of the popular anger has been directed at the Rajapaksa family, who have held key government positions for several decades. At the end of its civil war in 2009, Sri Lanka chose to focus more on providing goods to the domestic market instead of trying to break into foreign ones. So income from exports remained low, while the bill for imports kept growing.
At the end of its civil war in 2009, Sri Lanka chose to focus more on its domestic markets instead of selling to foreign ones. So income from exports 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 reserves.
Sri Lanka now imports $3bn (£2.3bn) more than it exports every year.
The cost of living has skyrocketed in Sri Lanka, with food costing up to 30% more than a year earlierThe cost of living has skyrocketed in Sri Lanka, with food costing up to 30% more than a year earlier
The government also racked up huge debts with countries including China, to fund what critics have called unnecessary infrastructure projects.
At the end of 2019, Sri Lanka had $7.6bn (£5.8bn) in foreign currency reserves.At the end of 2019, Sri Lanka had $7.6bn (£5.8bn) in foreign currency reserves.
However, by March 2020 its reserves had dwindled to only $1.93bn (£1.5bn). and recently the government said there was just $50m (£40.5m) at the country's disposal. By March 2020 its reserves had dwindled to $1.93bn (£1.5bn). and recently the government said it this figure had fallen to just $50m (£40.5m) .
The government also has also racked up huge debts with countries including China, to fund what critics have called unnecessary infrastructure projects.
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WATCH: Police in Sri Lanka fire tear gas and water cannon at protesters in KandyWATCH: Police in Sri Lanka fire tear gas and water cannon at protesters in Kandy
Several populist policies have also been blamed for worsening the situation. Much of the popular anger for the economic crisis which followed has been directed at President Gotabaya Rajapaksa and his brother, Mahinda, who he appointed to be prime minister, but then dismissed in May, in the face of widespread protests.
When he came to power in 2019, President Gotabaya Rajapaksa decided to offer big tax cuts, leaving less money to buy foreign currency. President Rajapaksa has been criticised for big tax cuts he introduced in 2019, after coming to power. Finance Minister Ali Sabry has said these lost the government more than $1.4bn (£1.13bn) a year in revenue.
Mr Rajapaksa now admits the tax cuts were a "mistake," and Finance Minister Sabry has said they resulted in an estimated loss of more than $1.4bn (£1.13bn) in revenue. When Sri Lanka's foreign currency shortages became a serious problem in early 2021, the government tried to limit the outflow by banning imports of chemical fertiliser, telling farmers to use locally sourced organic fertilisers instead.
When Sri Lanka's currency shortages became a real issue in early 2021, the government tried to stop the outflow of foreign currency by banning imports of chemical fertiliser, telling farmers to use organic fertilisers. 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.
An IMF report in March this year said the fertiliser ban (reversed in November 2021) had also hurt tea and rubber exports, leading to "potentially substantial" losses.An IMF report in March this year said the fertiliser ban (reversed in November 2021) had also hurt tea and rubber exports, leading to "potentially substantial" losses.
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
Since then, the government has banned the import of a wide range of "non-essential" items - from cars to certain types of food and even shoes. Does the government have a plan to solve the crisis?
The government also refused to let the Sri Lankan rupee fall against other currencies. It finally did so in March 2022, and the rupee fell more than 30% against the dollar. Prime Minister Ranil Wickremesinghe has said the government is now so short of funds that it will be printing money to pay employees' salaries. He warns this will lead to further price hikes, with inflation rising to 40%.
Ranil Wickremesinghe, the new prime minister, has announced the government will have to print money in order pay salaries, which he says will lead to further depreciation of the rupee. He also says state-owned Sri Lankan Airlines could be privatised.
He's also drawn up a plan to sell off the national airline in order to raise money.
How much foreign debt must Sri Lanka repay?How much foreign debt must Sri Lanka repay?
Sri Lanka's government has racked up $51bn (£39bn) in foreign debt.Sri Lanka's government has racked up $51bn (£39bn) in foreign debt.
This year, it will be required to pay $7bn (£5.4bn) to service these debts, with similar amounts for years to come. This year, it will be required to pay $7bn (£5.4bn) to service these debts, with similar amounts for years to come. The government is seeking emergency bridging loans of $3bn from the International Monetary Fund (IMF) so it can pay.
In April, the Sri Lankan government failed to make repayments totalling $78m. It was the first time Sri Lanka had defaulted on its foreign debts since independence. The IMF has said the government must raise interest rates and taxes as a condition of any loan.
Sri Lanka is seeking emergency loans of $3bn to pay for essential imports such as fuel. The World Bank has agreed to lend Sri Lanka $600m.
The World Bank has agreed to lend it $600m.
India has committed $1.9bn and may lend an additional $1.5bn for imports. It has also sent 65,000 tonnes of fertiliser and 400,000 tonnes of fuel, with more fuel shipments expected later in May.India has committed $1.9bn and may lend an additional $1.5bn for imports. It has also sent 65,000 tonnes of fertiliser and 400,000 tonnes of fuel, with more fuel shipments expected later in May.
The government is in talks about a bail-out from the International Monetary Fund (IMF). The IMF has said the government must raise interest rates and taxes as a condition for a loan, which would make the country's cost of living crisis worse. The G7 group of leading industrial countries - Canada, France, Germany, Italy, Japan, UK and the US - have said they will provide help to Sri Lanka in securing debt relief.
Sri Lanka owes $6.5bn to China and the two are in talks on how to restructure the debt.Sri Lanka owes $6.5bn to China and the two are in talks on how to restructure the debt.
China earlier agreed to bolster Sri Lanka's foreign currency reserves by swapping the Lankan rupee for its currency, the renminbi. Since then, it has signalled its displeasure over Colombo approaching the IMF for help.