Thousands of Sri Lankans are protesting in the streets, the president is about to resign, the prime minister’s house has been set on fire, and the country has run out of money. What is happening? Why is Sri Lanka in crisis? What went wrong with the country’s economy?
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Turmoil (n) – a state of confusion, uncertainty, or disorder
The whole region is in turmoil
Foreign Exchange Reserves (n) – the amounts of money in foreign currencies that a country has at a particular time
Exporting more than you import is the best way of building foreign exchange reserves
Mismanagement (n) – the process of organising or controlling something badly
Two schools were shut down due to financial mismanagement
Remittance (n) – money that is sent by a foreign worker back to their own country
Immigrants sent $45 billion in remittances to Latin America last year
Domestic (adj) – relating to a person’s own country
You do not need a passport for domestic flights
To lease (v) – to make a legal agreement by which money is paid to use land, a building, a vehicle etc for a period of time
Our building lease expires in two weeks
To storm (v) – to attack a place or building by entering suddenly in great numbers
The fortress was stormed by hundreds of soldiers
Bailout (n) – the act of helping a person or organisation that is in difficulty, usually by giving or lending money
The bank asked the government for a bailout
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As I’m writing this episode, there are currently thousands of Sri Lankans inside the country’s presidential palace. Protestors are swimming in the president’s swimming pool, walking through the palace halls, and crowds have surrounded the entire area.
Sri Lankan president Gotabaya Rajapaksa (or Gota as he is commonly known) has announced he will step down on July 13th. This podcast will be uploaded on July 13th… so you will know if that has actually taken place! The Prime Minister’s residence was also set on fire, and he has offered to resign as well.
Why are so many Sri Lankans protesting? Why is the South Asian country in crisis? And what is currently happening?
Today, we are going to look at these questions. And at the same time I will be introducing and explaining some of the most important vocabulary and phrases associated with this news story!
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Sri Lanka’s Economic Crisis
Sri Lanka has been in economic, political, and social turmoil for months. Prices for food are soaring, people cannot find fuel, and there are regular blackouts. Inflation is currently over 50%, meaning that the price of essential goods has risen rapidly.
Buses, trains, and ambulances have not been able to operate as Sri Lanka has run out of fuel. Last month, the Sri Lankan government banned all sales of petrol and diesel for “non-essential” vehicles to try and get public transport, health vehicles, and food trucks back on the road. In banning the sale of fuel, Sri Lanka has become the first country to do so since the 1970s oil crisis.
Why doesn’t Sri Lanka buy more fuel? Import some from abroad? Well… they’ve also run out of foreign exchange reserves. Foreign exchange reserves are basically the amount of foreign currency a country owns, and are essential for trade. Most foreign exchange reserves are held in US dollars, but countries usually own euros, British pounds, and Japanese yen as well.
Countries keep foreign currencies so that in an economic crisis, or a situation in which their own currency devalues, they will still have some money available for emergencies. Sri Lanka, however, has almost completely run out of foreign exchange reserves.
Why is Sri Lanka Having an Economic Crisis?
Without foreign currency reserves, Sri Lanka is basically unable to buy anything from other countries. And in May Sri Lanka failed to pay its foreign debt – the first time in the country’s history and clear sign of severe economic problems.
According to the Sri Lankan government, Covid 19 is to blame for the country’s problems. Before the pandemic, Sri Lanka had a major tourist industry, welcoming thousands of visitors to the country everyday who would bring with them their valuable foreign money.
Tourism was one of Sri Lanka’s biggest sources of foreign currency, and with international travel significantly more difficult and less common in recent years, Sri Lanka has less money. Moreover, a series of bombings in 2019 had already contributed to a reduction in visitors.
However, this is what the government has blamed for the economic problems. Experts from international organisations and other countries see things a little differently. They accuse Sri Lanka of economic mismanagement.
First, Sri Lanka has struggled with balancing its payments since the 1950s. The country imports far more than they export, and they have relied on tourism, remittances, and borrowing to bridge the gap and make sure they have enough money.
Then in 2009, just after a long and bloody civil war came to an end, Sri Lanka chose an economic policy which focused on providing resources and goods for the domestic market instead of international markets. This might sound like a great idea – using your own country’s products in your own country! But, it meant that income from exports was still low. And Sri Lanka still needed to import essential goods – like fuel.
To give you a clearer picture, Sri Lanka imports $3 billion more things than it exports. Every year, the country’s foreign exchange reserves would get lower and lower. In December 2019 they had $7.6 billion in foreign currencies; by March 2020 they had fallen to $1.93 billion; and recently it was announced they just had $50 million left.
You would think that a country with such financial problems would probably be spending less money. However, not Sri Lanka. Instead, the government engaged in massive infrastructure building projects. Amongst other projects, the country built the Hambantota Harbour and Colombo Port City. Although they cost over $17 billion to build, the government promised they would turn profitable and be a good investment.
Most economists disagreed with the Sri Lankan government. They suggested that the projects were politically motivated instead of economically motivated. The Hambantota project, for example, was widely viewed as misguided but it was located in the home region of the Rajapaksa family (the family of Sri Lanka’s president). And, like the economists all predicted, most of the infrastructure projects were unsuccessful.
How did Sri Lanka pay for these projects? They definitely didn’t have enough foreign exchange reserves. So where did they get the money from? Well… China. Sri Lanka has huge debts to many countries, but especially to China. China was willing to fund Sri Lanka’s unwise investment projects – and when those projects failed China was able to take control of the ports.
Sri Lanka leased 80% of the Hambantota harbour to a Chinese company for $1.12 billion – and that should have helped the debt problems, right? Well… not quite. The government took that money, added it to foreign reserves and paid off unrelated debt instead of using the money to pay the debt on the projects. And, they only leased China the project… meaning Sri Lanka still technically owns it and has all the debt.
The Rajapaksa Family
President Gotabaya Rajapaksa was elected in 2019. The Rajapaksa family has dominated Sri Lankan politics for around 20 years. Mahinda Rajapaksa became president in 2005, and his younger brother Gotabaya replaced him in 2019. Other members of the Rajapaksa family have been appointed to senior political positions as well.
After being elected in 2019, Gota decided to cut taxes. Not just a little tax cut, but a major tax cut. It has been estimated that the government has lost around $1.4 billion a year due to the tax cuts.
As the foreign currency shortage became more and more serious, President Gota wanted a way to reduce imports from foreign countries. Makes sense, right? If you are spending too much money on imports, reducing them is one method. After looking at a few different options, the government decided to ban imports of chemical fertilisers. The chemicals are used to help crops grow and were generally bought from overseas.
After banning the import of chemical fertilisers, the government told farmers to use local and organic fertilisers instead. What was wrong with this? Well, they didn’t work as well. There was a widespread crop failure in Sri Lanka, the country didn’t have enough food, and had to buy food from abroad…. Making its currency shortages and economic problems even worse! The fertiliser ban also damaged tea and rubber exports… again hurting the balance between exports and imports.
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What is Happening Now?
As you can see, Sri Lanka’s economy is in a terrible situation. Fuel shortages, high food prices, and power blackouts are common, and government policies have not been helping. Schools have closed and medicine cannot be imported from overseas. The government has almost completely run out of cash.
And, as you would expect, the Sri Lankan people are not happy.
The economic crisis started a series of protests that began in late March and resulted in the storming of the presidential palace last week. Thousands of protestors took to the streets, entered the presidential palace, and staged demonstrations across the country. The protestors blame the crisis on the government’s economic and financial mismanagement.
President Rajapaksa announced he would be stepping down on July 13th, but protestors have refused to leave the palace until they see an actual change in governments. The next president is supposed to be decided on July 20th.
While the Rajapaksa family have largely controlled Sri Lanka since the 2000s, the current situation has made them incredibly unpopular. Anger has only increased as protestors entered the homes and residence of the Rajapaksa family. The president and other senior politicians lived highly luxurious lives even with millions of Sri Lankans struggling to find food, pay bills, or work.
What is Next for Sri Lanka?
There is no quick fix for the country’s economic problems. It will take weeks, even months, before food and fuel supplies are back to normal. If the International Monetary Fund (IMF) decides against helping Sri Lanka… it could take even longer.
Opposition political parties have been holding talks in order to form a new government. In theory, as both the President and Prime Minister have resigned, the Speaker of Parliament should become interim president according to the Sri Lankan constitution. However, there is too much turmoil right now to predict the long term future of the government.
The IMF is discussing a bailout of the country, but they are demanding major economic reforms such as tax increases before they lend any money. The World Bank has lent $600 million; India has promised $1.9 billion and potentially another $1.5 billion for imports; and the G7 have said that they will help with debt relief.
The country is also looking at privatising the national airline, and has asked Russia and Qatar for low priced oil supplies.
However, Sri Lanka will still have many obstacles and challenges in its road to economic and political recovery! Sri Lanka still has around $50 billion in foreign debt. This year (and for the foreseeable future) they are required to pay back $7 billion – a difficult task when the country only has a few million dollars left in the bank.
On today’s episode of Thinking in English I have tried to explain the reasons behind Sri Lanka’s economic crisis. Thousands of Sri Lankans are protesting in the streets, demanding the resignation of their leaders, and suffering from a broken economy.
While the government blames the ongoing pandemic for a reduction in tourists, the truth seems to be that the economy has been badly managed for years. A lack of exports, wasteful infrastructure projects, and poor decision making by the government has effectively bankrupted the country.
It is difficult to see a quick recovery for Sri Lanka. Without major economic reforms, tax increases, and international help, it is likely problems will continue for years. For the thousands of Sri Lankans protesting on the streets, food and fuel are the biggest concerns right now. But overall, the economy requires much more help.
What do you think? How can Sri Lanka fix its economy? Has your country ever experienced a crisis like Sri Lanka?
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