Sri Lanka, April 2022

Sri Lanka

A hugely enjoyable holiday, wonderful people, gorgeous wildlife and a fascinating history. Also, going through one heck of a financial and economic crisis.

We saw diesel-fuelled commercial vehicles abandoned outside petrol stations, lining the roads around them. Lines and lines of people with jerry cans, anxiously waiting for new deliveries of petrol. Police were seen outside most petrol stations where large queues had formed.

During the weekend we also saw protests in Galle. Probably about 500-1000 people in three groups walking down the streets chanting and waving signs, mostly using expletives to describe how their “generation” has been treated by the ruling family, the Rajapksas. Sri Lanka is a democracy but this family were, so out guide told us, heavily involved in the fighting against the Tamils in the North of the island during the civil war in the 90s and 00s. As such they became heroes. Their father was the President. His son was the Prime Minister and he had another son in the government.

While we were there the government issues a 36 hour curfew to disperse the protestors. There were intermittent power cuts at the hotel, I presume the hotel had a separate generator as our disruptions were only ever for a few seconds at a time but others we know in other places, and supported by news reports, claimed the power was out for around 5 hours at a time.

What was causing all these problems? A lack of dollars, among other things. The Economist explains it best..

“When Gotabaya Rajapaksa became president of Sri Lanka in 2019, he inherited an economy in bad shape. Terrorist attacks and political crises had hit the country hard. Growth was at its lowest since 2001. Tourist arrivals—a big source of foreign currency—were down by nearly a fifth after steadily rising for a decade.

The new president quickly got to work. He and his ministers—the most influential ones are his brothers and nephews—cut taxes and started printing money. Inflation duly rose, tax collections plummeted and the budget deficit widened.

In the meantime tourism was hit by an even bigger shock than terrorism, in the form of covid-19. Even as foreign-currency receipts plunged, import bills were climbing, thanks to the global rise in commodity prices. A man of action, Mr Rajapaksa responded forcefully, albeit quixotically, prohibiting the import of motor vehicles in 2020. Last year he banned (imported) chemical fertilisers, ostensibly for public-health reasons, before the impending collapse of farming forced a reversal.

With inflation already high and the government’s prestige on the line, the central bank resisted a devaluation, instead burning through its foreign-exchange reserves. Dollars became hard to come by, impeding imports. That, in turn, led to shortages of diesel and cooking gas. The lack of fuel also crippled electricity generation which, because of a drought that has diminished output from hydropower plants, is increasingly dependent on oil and coal. The electricity board initiated rolling blackouts in February of up to seven-and-a-half hours a day. Many small businesses stopped work, unable to cope with gas shortages, power cuts and rising prices.

On March 7th the central bank gave up: having maintained a rate of 200 rupees to the dollar for five months, it devalued by 15%. A few days later it allowed the rupee to float. The currency slumped by a further 15%, to 265 rupees to the dollar.

By raising the cost of imports, the devaluation will exacerbate the main way in which this fiasco impinges on the lives of ordinary Sri Lankans: inflation. As it was, prices rose by more than 15% year-on-year in February, a 13-year high. Food prices leapt by more than 25%, double the rate six months earlier.

The cost of everything has shot up, including basics such as lentils, milk powder, sugar and wheat flour. Fares on planes, trains, buses and even autorickshaws have surged. State-mandated prices of dozens of medicines, including paracetamol, have been raised by 29%. The most shocking increases are for fuel. On March 12th the state-run oil-and-gas body pushed up the price of petrol by 43.5% and that of diesel by 45.5%. “I don’t blame the rulers. I blame the people who voted for them,” says Gayan Prasad, who works as a driver.”

All in all. A beautiful island with wonderful people has found itself in a hell of a mess. Lets hope they can find a resolution soon – and that they’re not a canary down the global economic mine. The conditions in Sri Lanka – Covid ravaged, heavily indebted – dodgy politicians… seems frighteningly familiar of other places I could name.