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Sri Lanka: Socioeconomic crisis - Anticipatory Analysis - 10 June 2022

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Sri Lanka
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ACAPS
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CRISIS OVERVIEW

Sri Lanka faces an economic crisis partly resulting from its twin deficit economy. A twin economy indicates that its domestic expenditure exceeds its national income, making it prone to external debt and reliance on foreign capital flows (ADB 03/2019; Chowdhury and Saleh 2007).

The Government has, for several years, acquired multiple loans from other countries and international organisations to finance the provision of public services (CNN 07/04/2022; NYT 25/03/2022). Several issues have also been hitting tourism in the country. Initially, a series of extremist attacks on churches and hotels started affecting the industry (which accounted for 5.6% of the country’s gross domestic product). The COVID-19 pandemic, which prevented travel, followed in 2020. Finally in 2022 came the war between Russia and Ukraine, two of the countries that accounted for the majority of tourists in the country (Vox 30/04/2022; VOA 05/05/2019). In 2021, the Sri Lankan Government also introduced a fertiliser ban that significantly reduced the production of rice and tea, two of its main export products (CNN 07/04/2022).

In May 2022, the country announced suspending the foreign debt repayment due that year (Outlook 27/05/2022; Reuters 12/04/2022). Since 2019, the Sri Lankan Government has reduced some taxes to stimulate the economy, but the decision instead considerably reduced its revenues (CNN 07/04/2022; BBC 20/05/2022). Under these conditions, the Government reduced its reserves by 70% in two years to pay off some of its debts, leaving it without sufficient resources to pay international actors for certain products, such as oil, leading to a shortage in the country (TOI 19/05/2022; The Indian Express 19/05/2022). The Sri Lankan currency has also depreciated sharply, making basic goods more expensive for the population (Reuters 22/04/2022; Business Standard 11/03/2022).

Monthly inflation rates in the country rose from 3% in January 2021 to 39.1% in May 2022, the highest recorded in history (TE accessed 27/05/2022). In March 2022, the Government announced a 13-hour blackout to save energy in the middle of the economic crisis (Al Jazeera 31/03/2022). Following the blackout, many people took to the streets to protest the economic crisis. Since then, there have been intermittent protests across the country (BBC 20/04/2022).

The economic crisis is affecting the daily life of the population. Hospitals have reported shortages of medicines, price increases have made food unaffordable for part of the population, and some people have already started to migrate to India to escape the effects of the crisis (Government of Japan/WFP 20/05/2022; Government of Australia 08/04/2022; CNA 23/05/2022).

Food production in 2022 has also been lower than usual because of the ban on chemical fertilisers, which will likely affect food access for several months (Al Jazeera 18/05/2022).