Sri Lanka is famous for its pristine beaches, clean streets, heritage buildings, delicious cuisine and zestful people.
However, today it is plunged into chaos — it faces its worst economic crisis since 1948, when the country gained independence, leaving it on the verge of bankruptcy.
A severe shortage of foreign currency has left President Gotabaya Rajapaksa’s government unable to pay for essential imports, including fuel, leading to debilitating power cuts lasting up to 13 hours.
Critics say the roots of the crisis lie in economic mismanagement by successive governments that created and sustained a twin deficit – a budget shortfall alongside a current account deficit.
As of 4 April, the economic crisis devolved into a political one with Sri Lanka’s Cabinet of Ministers resigning with immediate effect.
What happens next is hard to predict, but here’s a summary of how things went so wrong for the island nation.
After winning Sri Lanka’s presidential election and months ahead of a parliamentary ballot that would again test his popularity, Gotabaya Rajapaksa announced sweeping tax cuts.
The Cabinet cut the value added tax to eight per cent from 15 per cent and also abolished seven other taxes, including a two per cent nation building tax paid by businesses.
The sweeping tax cuts led to a credit rating downgrade in 2020, leading to Sri Lanka losing access to international financial markets.
Sri Lanka started dipping into its foreign reserves to meet its debt obligations. This resulted in foreign reserves plummeting from a healthy level of $8,864 million in June 2019 to $2,361 million in January 2022.