Economic Crisis in Sri Lanka

Economic Crisis in Sri Lanka: Analysed and Explained!

This article on “Economic Crisis in Sri Lanka: All You Need to Know” was written by Jagriti Gupta an intern at Legal Upanishad.


It is important that we note the weaknesses in our financial system, and work towards implementing solutions before the next crisis occurs.”- Gordon L. Eade

This quote gives the best advice to the underdeveloped and developing nations to pay heed given the present cataclysmic state of affairs in the Sri Lankan economy. The provision of such disaster except for its escalated degree was apparent to various economists and scholars due to the faulty and substandard economic approach taken by the people at the helm of the government in Sri Lanka. Now such worsening economic conditions have taken a serious toll on peace and stability in Sri Lanka accompanied by serious political turmoil due to the defection of its President Gotabaya Rajapaksa. The political crisis was also aggravated when Ranil Wickremesinghe assumed the position of President which was vehemently protested by many Sri Lankans.

In this article, a crisp and diligent effort has been made to explain the economic crisis in Sri Lanka and ascertain the reasons for such an economic and political debacle in Sri Lanka.

What is happening in Sri Lanka?

Sri Lanka is facing its worst economic crisis since its independence in 1948 which started in 2019 and reached its epitome in April 2022 when it for the first time defaulted on its $51 billion foreign debt pile despite the sincere assistance from India and other countries.

Currently, the country is brimming with protests which started in the capital, Colombo, in April 2022 and these protests erupted as a result of the agitation towards a series of problems that include deficiency of essential services and commodities like buses, trains, and medicines, fuel, basic food items, etc., such deficiency and shortage of basic things have caused their prices to skyrocket and further increasing their unavailability. Such a vicious circle of problems has resulted in the closing down of schools and has forced people to remain indoors and do their office work from home to save over consumption of essential resources as well as to safeguard themselves from any unforeseen and unfortunate circumstances like disease, bodily injury, etc.

Unfortunately, it has become a normal scenario to see long queues of people waiting to buy basic commodities and still not being able to access such coveted products. Unofficially, the inflation rates have occupied a second position after Zimbabwe with an increase of 60.8 from last year. As per the UN Report, more than 3/4th of the population in Sri Lanka has decreased their food consumption due to its severe paucity.

Due to a faulty practice of importing the majority proportion of basic items from other countries which is way more than the exports, the foreign exchange reserves have suffered serious loss and until February 2022, the reserves had only $2.31 billion but the country has accumulated a debt of $4 billion in 2022, including a $1 billion international sovereign bond (ISB) maturing in July. The substantive portion of such debt is from the ISBs and other major creditors are Asian Development Bank, Japan, and China.

Economic Crisis in Sri Lanka
Economic Crisis in Sri Lanka

Reasons for Economic Crisis in Sri Lanka

The country’s leadership has blamed the Covid-19 pandemic that created a rampage in the country’s most popular and lucrative sector i.e., tourism. However, according to the crackerjacks of economics, the pathetic economic condition is a result of multiple misguided economic decisions taken by the successive governments who due to their sheer ignorance and incompetency brought the country to its nadir point. These decisions made Sri Lanka’s economy a classic twin deficit system which as per a 2019 Asian Development Bank working paper, is defined as a system in which a country’s national outlay exceeds its national income due to its incapacity to produce exportable commodities and services.

A time-line reasoning for the present system is given below:

  1. Civil War in 2009: The country witnessed a decade-long civil war which although got concluded in 2009 but left the country in a state of disarray which the state sought to rectify by turning inward toward domestic production. This harmed foreign exchange reserves since the push towards domestic production neglected attention to exports along with further reliance on imported goods.
  2. New taxation policy in 2019: In 2019, the government introduced unprompted cuts on the income tax which was done to appease the voting citizens without any regard for its economic repercussions. This had drained an already cash-strapped country.
  3. Pandemic in 2020: Due to the destruction caused by the COVID-19 pandemic, especially the ban on travel and closure of borders, caused the shutdown of Lanka’s most profitable industries i.e., tourism which before the pandemic in 2018 was the major source of employment since it generated more than 388,000 jobs. Furthermore, this sector contributed around 5% of the country’s GDP. All of this was severely affected and the GDP dipped to 0.8% and there was a loss of 40000 jobs.
  4. Ban on foreign -trade made chemical fertilizers in 2021 and Russia-Ukraine war in 2022: The Sri Lankan government in a bid to tap down its imports and dependence on foreign products, prohibited the import of chemical fertilizers and introduced organic farming which went against its motives since a prevalent resource-deficit economy could not fulfill the requirements of organic farming which made it further reliant on imports which most of the farmers were unable to buy due to the high costs. Also, the crops grown through organic farming were far less than the ones grown by chemical fertilizers which led to major crop failure further forcing the people to depend upon imports to curtail food shortage. In 2022, the cracks and hollow functioning of the economy were now at their epitome and had a major fallout which got further aggravated due to the Russia-Ukraine war which accelerated the oil prices and subsequent high inflation.


The political and economic crisis in Sri Lanka is a lesson to various developing and under-developed countries which tells that how bad decisions taken for decades can create a loop of destruction in the economy. Furthermore, bad economic conditions tend to disrupt the peace and stability of a country and create an environment of discouragement and promote anarchy evidenced by the storming of protesters into the Presidential Palace of the erstwhile President Gotabaya Rajapaksa and their continuous struggle against the present President Wickremesinghe. Hence, leaders of different countries should pay heed to the circumstances of their country along with proper research before adopting or enacting a particular economic policy.


  1. Agence France- Presse, “Sri Lankan Crisis: Explained in 5 points”, NDTV, July 13, 2022, Available at: (Accessed August 2, 2022).
  2. Ayesh Parera, “Sri Lanka: Why is the country in an economic crisis?”, BBC News, July 14, 2022, Available at: (Accessed August 2, 2022).
  3. Avery Koop, “News Explainer: The Economic Crisis in Sri Lanka”, Visual Capitalist, June 8, 2022, Available at: (Accessed August 2, 2022).
  4. Reuters, “Explained: What led to Sri Lanka’s economic crisis, and who’s helping?”, Indian Express, May 19, 2022, Available at: (Accessed August 2, 2022).
  5. Anusha Ondaatjee, “Sri Lanka Inflation Rate Rises to 60.8% as Dollar Crunch Persists”, Bloomberg, July 29, 2022, Available at: (Accessed August 2, 2022).