How Sri Lanka Landed in a Crisis and What It Means

Months of protests in Sri Lanka over soaring inflation, shortages of food and fuel and lengthy power cuts have toppled the government in the South Asian nation and led to its first sovereign debt default since gaining independence from Britain in 1948. The political turmoil -- and sporadic outbreaks of violence -- were complicating efforts to manage the island’s foreign exchange crisis and secure more funds to keep its tourism-reliant economy running, having already been hit hard by the Covid-19 pandemic.

In late 2019, newly elected President Gotabaya Rajapaksa carried out populist tax cuts, reducing revenues just months before the pandemic devastated the economy, with international flights grounded and successive lockdowns ordered. Remittances from overseas Sri Lankan workers dried up as well as many lost their jobs. Even though Sri Lanka has received credit lines from neighbors like India, it was unable to regularly pay for imports of fuel and essential foods. Making matters worse was Rajapaksa’s pivot in 2021 to organic farming with a ban on chemical fertilizers that triggered farmer protests and saw production of critical tea and rice crops decline.