Inherited problems that led to Sri Lanka’s economic crisis

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Sri Lanka’s economy is sliding into chaos, afflicted with multiple crises: a steep fall in foreign exchange revenues because of the COVID pandemic, a difficult-to-manage external debt servicing burden, a collapse in the volume of foreign exchange reserves and, finally, the ripple effects of the war in Ukraine. Between January 2020 and mid March 2022, foreign exchange reserves fell by as much as 70 per cent to around $2.4 billion. A collateral trend that compounds the crisis has been a sharp depreciation of the Sri Lankan rupee. The Central Bank of Sri Lanka (CBSL) had been avoiding a devaluation by keeping the official exchange rate at 200 rupees to the dollar for months, but at the end of the first week of March, it gave in and devalued the currency by 15 per cent. Even that level was unsustainable, and the rupee was soon allowed to float, setting off a fall to the 300 rupees to the dollar mark by end March.

Underlying the crisis was a set of…

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