Sri Lanka Economic Crash: Reason for Bankrupt

Sri Lanka, an island nation of 22 million, is facing anĀ economic and political crisis, with protesters taking to the streets in defiance of curfews and government ministers stepping down en masse.

Driving the discontent is the worst economic downturn since the South Asian country gained independence in 1948, with crippling inflation sending the cost of basic goods skyrocketing. Now question arise why inflation rate is so high and why Sri Lankan Government didn’t tackle it.

Reason For Economic Crisis:

Over the past decade, the Sri Lankan government has borrowed vast sums of money from foreign lenders to fund public services, said Murtaza Jafferjee, chair of Colombo-based think tank Advocata Institute.

This borrowing spree has coincided with a series of hammer blows to the Sri Lankan economy, from both natural disasters — such as heavy monsoons — to man-made catastrophes, including a government ban on chemical fertilizers that decimated farmers’ harvests.
These problems were compounded in 2018, when the President’s dismissal of the Prime Minister sparked a constitutional crisis; the following year, when hundreds of people at churches and luxury hotels were killed in the 2019 Easter bombings; and from 2020 onwards with the arrival of theĀ Covid-19 pandemic.

Facing a massive deficit, President Gotabaya Rajapaksa slashed taxes in a doomed attempt to stimulate the economy.But the move backfired, instead hitting government revenue. That prompted rating agencies to downgrade Sri Lanka to near default levels, meaning the country lost access to overseas markets.

Sri Lanka then had to fall back on its foreign exchange reserves to pay off government debt, shrinking its reserves from $6.9 billion in 2018 to $2.2 billion this year. This impacted imports of fuel and other essentials, which sent prices soaring.

Topping all that, the government in March floated the Sri Lankan rupee — meaning its price was determined based on the demand and supply of foreign exchange markets.That move appeared aimed at devaluing the currency to qualify for a loan from the International Monetary Fund (IMF) and encourage remittances.

Now Sri Lankan People/Protesters are demanding the resignation of President Rajapaksa. They are incapable to run the government.

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