The most striking thing about Sri Lanka’s economic crisis is how predictable it was.
More than a year ago, many citizens began to realise that reckoning was inevitable. They began to fortify themselves—some to profiteer, others to simply stay afloat.
“That there would be a crisis was obvious since at least November 2020,” said Dhananath Fernando, COO of Advocata, an economics-focussed think-tank based in capital Colombo. “Economists have been raising red flags on the debt crisis since 2020.”
The Sri Lankans who got the crisis right
“I began taking large rupee-denominated loans in 2021,” said Saliya Gunasinghe. “I work for a foreign firm and earn dollars. I was able to borrow in rupees at a reasonable interest rate. I took loans and bought real estate, anticipating a crash in the value of the rupee.”
When he bought his property, the dollar stood at 200 Lankan rupees; now it is nearing 370.
“My repayments, in dollar terms, have almost halved and I anticipate they will fall further. I might end up getting my apartment for virtually nothing,” Gunasinghe said.
By late 2020, many like Gunasinghe were preparing for the worst. For instance, the cryptocurrency space attracted a lot of interest.
“People saw the central bank struggling to maintain an artificial currency peg. Many knew it would crash and started converting their cash savings to stable coins like USD-T,” according to Prashan Loganathan, an active cryptocurrency trader based in Negombo, a city on the western coast of the island nation.
“Those who managed to convert at the rate offered a year ago are comfortable. Those who didn’t regret it.”
Commodities were another arena. In 2021, merchants began to hoard stuff like sugar, flour, and cooking gas cylinders. “We bought these cylinders for 2,500 (Lankan rupees), but we are selling for a 4x-5x profit,” says Saman, a black-market operative who declined to give his surname.
For others, though, it was more a matter of survival.
Take Rosie Wijesinghe, for instance. A homemaker residing in Colombo’s affluent Colpetty neighbourhood where power supply is “usually very reliable,” she let her son persuade her into buying a power generator in 2021. She also got some solar cells installed.
By this March, many parts of the country were experiencing power outages, some reportedly up to 13 hours long every day.
Nevertheless, for every household relatively prepared for the crisis, there were several that weren’t. The worst of this lot seems to have been the Sri Lankan government itself.
A totally unprepared Sri Lankan government
Sri Lanka has run sizeable trade deficits for decades. As the debts matured, the years after 2020 were expected to see high levels of debt-servicing. In 2022, the government was scheduled to repay an amount equivalent to 90% of its entire budget spending.
“The government refused to accept the reality of a default. Then went on to make a series of policy decisions that further exacerbated matters,” said Umesh Moramudali, an economist and a lecturer at the University of Colombo.
The result has been that state reserves of commodities like fuel, flour, and coal have been entirely insufficient to tackle the crisis. Talks with the IMF to restructure the country’s clearly unsustainable debt began very late stage.
With no means to import further goods, once upper middle-income Sri Lanka is, by now, dependent on handouts from neighbours.