The Sri Lankan Economic Crisis And How It Can Move Past It

The Sri Lankan Economic Crisis And How It Can Move Past It

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On July 13, hundreds of protestors in Sri Lanka gathered around their nation’s capital, Colombo, in the wake of President Rajapaksa’s escape to the Maldives. Since April, protestors have been calling for political leaders’ resignation due to their failure to prevent the economic crisis that has plagued the country for the past three years. As the country faces the worst stages of this crisis, questions have begun to follow regarding the current political leadership and its future beyond this economic collapse.


The beginnings of Sri Lanka’s economic collapse can be traced back to 2019, when the government began imposing a series of tax cuts, lowering the number of registered taxpayers by nearly 33%, and causing the Sri Lankan government to lose billions in revenue. As a result, rating agencies lowered the sovereign credit rating, making it more difficult for Sri Lanka to take on more debt, which it had assumed following its civil war.

Another factor in this economic collapse was the tourism industry. Nearly a tenth of Sri Lanka’s GDP comes from its tourism industry, which had already suffered from the Easter Day bombings in April of 2019. During the global pandemic, Sri Lanka suffered a massive loss in its tourism industry as well.


The economic crisis of Sri Lanka maintained its severity throughout the first two years of the COVID-19 Pandemic, seeing rampant inflation amidst scattered protests against worsening national debt. The crisis led to the current economic collapse in April of 2022, when Sri Lanka announced it would default due to its crippling debt. This marked its first default since its independence in 1948 and the first state in the Asia-Pacific Region to default in the twenty-first century. Sri Lanka’s inflation rate increased to 56% in early July, significantly decreasing the purchasing power of its citizens.

Sri Lanka’s default has led to worsening conditions for its people. The first sign appeared in August 2021, when Sri Lanka declared a food emergency. The emergency was caused by the nation’s failure to transition to an organic agricultural industry, outlawing the use of fertilizers and pesticides, and leaving the majority of Sri Lanka’s agrarian economy unable to produce the results the government demanded. After declaring this food emergency, the government denied food shortages. This trend continued with medicine as hospitals struggled to keep up with the rising health issues of food shortages. Many hospitals in Sri Lanka canceled nearly all of their surgeries and other scheduled procedures,  failing to provide for sick and injured people. 

In June 2022, Sri Lanka declared a fuel and electricity shortage, mandating that only essential vehicles would be able to use the little fuel the country had stored, leaving people without proper transportation. Additionally, power shortages nationwide often resulted in twelve-hour stretches where millions were without electricity. This was the tipping point of the already hazardous conditions the Sri Lankans faced, inciting the protests in Colombo in early July. Protestors had long been calling for political change amidst the economic crisis, seeing as several members of the Sri Lankan Parliament had left. They eventually succeeded as they forced their president to resign in favor of the prime minister.

Possible Solutions

In 2022, the Sri Lankan government took steps to reverse the economic downfall it had imposed on itself. Besides the leadership changes, the Sri Lankan government began advocating for fiscal policies to restore the country to its original form. This includes the finance minister’s call to increase the value-added tax from the eight percent set in 2019 to a more sustainable fourteen percent. Additionally, the government, which had initially been hesitant about receiving aid from the IMF, acknowledged its failures in its agricultural transition and actions early on in the economic crisis, allowing the possibility for the IMF to assist the country with its current conditions and cover its local and national debt.

With new leadership amidst an already tense country, Sri Lanka looks to escape the economic crisis it has been facing for the last three years, implementing the monetary and agrarian policies that it had previously failed to pass.