Sri Lanka‘s economic crisis looks to have finally toppled President Gotabaya Rajapaksa. Rajapaksa has not commented directly but he plans to step down on July 13, the country’s parliamentary speaker said on Saturday, bowing to intense pressure after a violent day of protests in which demonstrators stormed the president’s official residence and set fire to the prime minister’s home in Colombo.
Anti-government protesters angry over power blackouts, shortages of basic goods and rising prices have long demanded that Rajapaksa steps down, but the retired military officer has for months resisted the demands, invoking emergency powers in an attempt to maintain control.
The violence and political chaos gripping the island nation of 22 million comes amid negotiations with the International Monetary Fund (IMF) over a rescue plan, as well as proposals to restructure its sovereign debt, both of which could be thrown into disarray.
Analysts say that economic mismanagement by successive governments has weakened Sri Lanka’s public finances, leaving national expenditure in excess of income and the production of tradable goods and services at inadequate levels.
The situation was exacerbated by deep tax cuts enacted by the Rajapaksa government soon after it took office in 2019. Months later, the COVID-19 pandemic struck.
That wiped out much of Sri Lanka’s revenue base, most notably from the lucrative tourism industry, while remittances from nationals working abroad dropped and were further sapped by an inflexible foreign exchange rate.
Rating agencies, concerned about government finances and its inability to repay large foreign debt, downgraded Sri Lanka’s credit ratings from 2020 onwards, eventually locking the country out of international financial markets.
To keep the economy afloat, the government leaned heavily on its foreign exchange reserves, eroding them by more than 70% in two years.
The crisis has crippled Sri Lanka, once seen as a model for a developing economy. Fuel shortages have led to long queues at filling stations as well as frequent blackouts, and hospitals have run short of medicine. Runaway inflation reached 54.6 percent last month and could rise to 70 percent, the central bank has said.
Source: eNCA
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