What drove Sri Lanka into its worst economic crisis?

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Sri Lanka's Economic Collapse: A Confluence of Factors

Sri Lanka is currently grappling with its most severe economic crisis since gaining independence in 1948, a situation exacerbated by a combination of unsustainable debt from ill-conceived infrastructure projects, ill-timed fiscal policies, and external shocks. The public's frustration has mounted due to prolonged power outages and critical shortages of essential goods like food, fuel, and medicine, leading to widespread protests.
Questionable Infrastructure Investments and Chinese Loans

A significant contributor to Sri Lanka's debt burden has been substantial spending on infrastructure projects, many of which were financed by Chinese loans and have proven to be economically unviable. The Hambantota deep-sea port, for instance, incurred losses of US$300 million within its first six years of operation. Nearby, a large conference centre remains largely unused, and a US$200 million airport has struggled to generate enough revenue to cover its electricity costs. These ambitious, and ultimately costly, projects were heavily promoted by the influential Rajapaksa family.
Impact of Ill-Timed Tax Cuts and Fiscal Mismanagement

Following his election, President Gotabaya Rajapaksa appointed his brother Mahinda as prime minister and enacted sweeping tax cuts, which significantly widened the nation's budget deficit. This fiscal decision, implemented shortly before the global economic downturn, was compounded by the country's already precarious debt situation. International credit rating agencies responded by downgrading Sri Lanka, citing concerns over spiralling public debt and reduced capacity to secure further loans.
External Shocks from the Pandemic and Agricultural Policy Failures

The global coronavirus pandemic delivered a severe blow to Sri Lanka's economy by halting international tourism, a crucial source of foreign exchange. Simultaneously, remittances from Sri Lankans working abroad, another vital income stream, significantly decreased. Compounding these issues, a government-imposed ban on imports, including essential fertilisers and agricultural chemicals in 2021, aimed at promoting organic farming. This policy led to a sharp decline in agricultural yields and negatively impacted tea production, a key export commodity.
Depleted Reserves and Debt Default

By late 2021, Sri Lanka's foreign exchange reserves had plummeted to US$2.7 billion, a stark decrease from the US$7.5 billion at the beginning of President Rajapaksa's term two years prior. This depletion of reserves made it increasingly difficult to finance imports, leading to shortages of staple foods, petrol, kerosene, and oil for electricity generation. Consequently, Sri Lanka was compelled to default on its US$51 billion foreign debt, a move that further destabilised its financial standing and initiated negotiations for an International Monetary Fund bailout.

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What drove Sri Lanka into its worst economic crisis?

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