Why is Sri Lanka facing its worst economic crisis in decades?

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Sri Lanka is facing its worst economic crisis in decades due to a severe depletion of foreign exchange reserves, leading to currency devaluation and an inability to import essential goods.

Sri Lanka is experiencing its most significant economic downturn in decades, marked by a drastic 70% reduction in foreign exchange reserves over the past two years. This sharp decline has precipitated a devaluation of the Sri Lankan Rupee and has severely hampered the nation's capacity to finance critical imports. Consequently, the country is grappling with shortages of vital commodities, including fuel, and experiencing soaring food prices, which have fuelled public discontent and protests. The government is now preparing for discussions with the International Monetary Fund concerning the repayment of its foreign debt, a situation exacerbated by the ongoing economic pressures.
Depletion of Foreign Exchange Reserves

The foundation of Sri Lanka's current economic distress lies in the substantial erosion of its foreign exchange reserves. Over a two-year period, these reserves have diminished by a staggering 70%. This significant drop has directly contributed to a weakening of the national currency and has created immense difficulties in securing essential imports required for the population of 22 million.
Impact on Essential Imports and Prices

The scarcity of foreign currency has resulted in critical shortages of essential items. While fuel supplies are limited, food prices have escalated dramatically. For instance, rice prices have doubled within the last year, directly impacting household budgets and contributing to the growing unrest. India has stepped in to provide some relief by extending a US$1 billion credit line, which is being used to facilitate the shipment of essential goods like rice, fuel, and medicine.
Public Unrest and Debt Concerns

The economic hardships have triggered widespread protests across Sri Lanka, with citizens expressing their frustration over the escalating cost of living and the lack of basic necessities. This public outcry intensified following the declaration of a nationwide public emergency by President Gotabaya Rajapaksa. Amidst these domestic challenges, the government is preparing to engage in crucial talks with the International Monetary Fund, focusing on the country's capacity to meet its foreign debt obligations.

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Why is Sri Lanka facing its worst economic crisis in decades?

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