Sri Lanka on ‘brink of economic collapse’ as Russia-Ukraine war begins

Sri Lanka’s crisis is deepening. Rapidly dwindling foreign reserves, kilometer-long queues for petrol, diesel, cooking gas, milk powder and even medicines, and the tourism sector to take the latest hit, courtesy of the Russian invasion of Ukraine.

Sri Lanka, which is facing the worst economic crisis in its modern history, recently lifted most restrictions on foreign tourists to boost the tourism sector and earn some much-needed foreign exchange.

According to the Lanka Tourism Board, currently, about 25% of foreign tourists to the island nation are from Russia and Ukraine. With the West tightening the noose on the Russian economy, stranded Russian tourists have run out of money. Their debit and credit cards have become inactive, causing huge hardship. As all flights back home have been canceled, tourists from Ukraine are also stranded along with the Russians.

The Sri Lankan government has already extended his visa by two more months keeping in mind the deteriorating situation. Tourism Minister Prasanna Ranatunga said Sri Lanka has decided to take care of the thousands of Russian and Ukrainian tourists stranded on the island despite the huge economic crisis.

Several luxury hotels and resort owners have also come forward to look after them. “Tourism is completely devastated and we were hoping to make some money. These rich people have now become paupers because of the war. Now we are being forced to help them. It is an irony,” said a hotel owner in Colombo.

The war has put the brakes on the arrival of tourists from the rest of Europe and America. Concerned about the outbreak of war in their countries, Western countries have canceled bookings, adding to the crisis.

Sri Lanka exports tea to Russia and Ukraine. It has also taken a big hit in the last two weeks. Sri Lankan tourism is a $5 billion industry, employing about 3 million people (about 15% of the population of the entire island nation).

Back-to-back lockdowns have ruined the once-thriving economy. Banks have run out of foreign reserves and no bank is issuing letters of credit (LoCs), jeopardizing the heavily import-based economy. The Central Bank of Sri Lanka (CBSL) has fixed the exchange rate at LKR 200 per US dollar, but it is trading at LKR 275 in the black market.

“Due to the huge gap between the official exchange rate and the black market rate, most of the foreign remittances are taking place through hawala routes, further depleting the foreign reserves in the country. No one is using banks for foreign transactions. The situation is so bad that even three-wheeler drivers have become hawala agents. If this situation continues, the Sri Lankan rupee will soon become worthless,” said a Sri Lankan businessman from Dubai on condition of anonymity.

The beleaguered government says that CBSL has about $2.5 billion in forex. But unofficial sources claim it is less than $800 million. Sri Lanka needs 500 million dollars to import oil every month. The acute shortage of foreign exchange has also affected the oil, gas and power sectors. With no dollars to pay for these essentials, fuel pumps are drying up. The shortage of cooking gas has badly affected the country, forcing the villagers and the lower class to use firewood for cooking.

It is the summer season and the water level of hydroelectric dams is depleting rapidly due to which the electricity board has to cut power for 7-8 hours every day. With no money to buy coal and diesel to power plants, the power crisis could worsen in the peak summer months of April and May.

Many pharmacies have run out of life-saving and essential medicines because importers do not have the dollars to buy them from overseas. “The situation is very bad. There are no paracetamol tablets in pharmacies,” said a resident of Colombo.

India, the nearest neighbor, has already given more than $2.5 billion to tackle the crisis and has also shipped petroleum products. China has already given more monetary aid.

The panicked government is holding a series of talks with the Gulf countries for relief. Sri Lankan President Gotabaya Rajapaksa has already held talks with the Crown Prince of Abu Dhabi and is seeking immediate help.

Meanwhile, Finance Minister Basil Rajapaksa has postponed his scheduled visit to New Delhi to discuss a bailout for unknown reasons.

President Gotabaya, who has been criticized for his mishandling of the country’s economic affairs, creating a Latin America-like situation, has sacked two of his cabinet ministers for speaking out against his government.

One of the dismissed ministers, Uday Gammanapila, has described Tulsi Rajapaksa as an “ugly American”. He has demanded that he should take full responsibility for the economic crisis the country is facing.

Addressing the media, he said that “an American citizen” (Basil) was deciding the fate of the country and said he would tell who pushed the island to the brink of economic collapse.

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