Energy Shortages Hit Sri Lanka Amid Worsening Economic Crisis

Cash-strapped country suffers nationwide power disruption . . .

For months, Sri Lanka has been facing an acute economic crisis. With depleted foreign reserves and spiralling inflation, the government is struggling to pay for imported fuel, medicines, and other essential goods. Many gas stations have run dry, and several thermal power stations have had to shut down, causing periodic power outages over the last few weeks. The state-run Bank of Ceylon confirmed receipt of a 40,000-tonne shipment of diesel, and is expecting a similar-sized shipment on Sunday. However, it remains uncertain if the Sri Lankan government will be able to pay for the C$42-million shipment.

What is fuelling the cash crisis?

A mix of domestic and external factors has been contributing to Sri Lanka's worst economic crisis in many decades. Before the pandemic, Sri Lanka was already deep in debt to several foreign creditors, including China, India, and Japan, over funding for national infrastructure development projects. President Gotabaya Rajapaksa's drastic cuts to the nation’s value-added tax since 2019 have cost the government billions in revenue, and its push to quickly move toward 100 per cent organic farming last year led to skyrocketing food prices. The pandemic struck another blow to the economy, which is heavily dependent on tourism. Compounded by soaring inflation rates and slower than expected post-pandemic recovery, myriad factors are fuelling the nation’s ongoing economic crisis.

What's next?

President Rajapaksa is negotiating debt relief with the country’s major overseas bondholders to avoid default. In particular, he consulted China in January to restructure its debt repayments of C$4.3 billion connected to funding that Sri Lanka received to support infrastructure projects under China’s Belt and Road Initiative. The country further secured a C$1.15-billion loan from India – including a C$512-million currency swap – to replenish its depleted foreign reserves. However, as the country still needs to deal with C$5.77-billion in debt repayments this year, the government has indicated that Sri Lanka is also open to discussions with the International Monetary Fund (IMF) and has been in touch with global financial institutions such as the World Bank and the Asian Development Bank (ADB) for possible financial assistance.