The cause for Sri Lanka’s foreign exchange crisis is something that could be understood by anyone. It’s not something to be commented on only by economists, experts and the like.
The root cause
To put simply, Sri Lanka has been buying more goods and services from the rest of the world, compared to what it sells to the rest of the world. Around $ 2 billion every year (the average over the last 5 and 10 years), which is effectively financed through foreign debt. Figure 1 and Figure 2 present tables reproduced from our articles “Understanding the fate of the Rupee” in 2018 (https://www.ft.lk/Opinion-and-Issues/Understanding-the-fate-of-the-rupee/14-662146) and “Why foreign earnings could solve the debt problem” in 2020 (https://www.ft.lk/Columnists/Why-foreign-earnings-could-solve-the-debt-problem/4-693639).
This has been happening since 1978, which is the primary reason for the high foreign debt burden. While the earlier loans were at concessionary rates, the latter ones were at market rates, as the country’s economy passed the threshold level and the concessionary rates were no longer available. When one doesn’t live within its means, it’s not sustainable. Somehow, we have managed to go for 44 years, which means the problem has become a crisis now.
Who created the crisis, coming out of it, and IMF danger
Understanding the fate of the rupee | Daily FT
Why foreign earnings could solve the debt problem | Daily FT