The South Asian nation of Sri Lanka is experiencing an unexpected economic collapse, which has put the government into a deep crisis. The people protested against the government which led to the resignation of the prime minister.
The warning of a potential economic disaster began long before. Economic growth in Sri Lanka slowed from 2017 through 2019 before turning negative in 2020. Sri Lanka's foreign currency reserves had fallen. Sri Lanka's economy relies on imported goods, even for basic products like sugar, cereals, and pharmaceuticals. Sri Lanka has to import these goods from other countries and because of the low foreign currency reserves, it is difficult for Sri Lanka to import goods. This leads to the rapid inflation in the price of these basic commodities in the country. On top of that, there's an electricity problem, a power crisis too and there is a debt payment of 4 million due from Sri Lanka.
There are multiple reasons behind today's conditions in Sri Lanka.
The Easter Day Bombing: Sri Lanka was one of the most popular destinations for tourism. Thousands of foreign tourists visit the country every year and about 12% to 13% of Sri Lanka's economy depends on tourism. The number of tourists decreased when in April 2019, there were multiple bombings in the country now known as 'the Easter Day Bombings'. Three churches and three buildings were targeted across several cities so many people died including foreign nationals and that's how this one day had a terrible effect on tourism.
Nationwide Lockdown: In March 2020, the COVID-19 pandemic struck, shutting down tourism all around the world affected Sri Lanka's growth which is dependent on revenue from tourism.
Deep Tax Cut: The Sri Lankan president, Gotabaya Rajapaksa, decided to cut the Value Added Tax, or VAT, by half. The reason behind the tax cut was that if people paid less tax they would spend more money. And with the increase in consumption, there would be economic growth. But because of the COVID-19 pandemic hit and the lockdown, there has been no seen increase in consumption and a huge revenue loss has been suffered by the government.
Sudden Switch to Organic Farming: Next the idea of converting the country's agriculture into organic has also gone wrong. Government sudden decision to ban nationwide synthetic fertilisers and pesticides overnight has further aggravated the crisis by causing decreased agricultural production which in turn caused a rise in the prices of essential commodities.
For these reasons, today, people are coming out on the street to defy the curfew. The crisis led to the resignation of all the ministers in the Sri Lankan government, along with Sri Lanka's prime minister, Mahindra Rajapaksa, who also resigned.
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