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Sri Lanka’s Economic Crisis and Its Impact on Society and Business (2022–2025)

Sri Lanka, once known for its steady growth and tourism-friendly image, experienced a severe economic crisis beginning in 2022. This case study explores what led to the crisis, how it affected the lives of people and businesses, and what steps the country has taken toward recovery by 2025.

Background

Before the crisis, Sri Lanka was already facing serious financial pressures. Years of borrowing, especially for large infrastructure projects, left the country with rising foreign debt. At the same time, weak tax revenue and high import dependence made the economy vulnerable. The COVID-19 pandemic pushed things further downhill, wiping out key sources of income like tourism and remittances.

How the Crisis Unfolded

In 2022, the crisis became visible and intense:

• Sri Lanka defaulted on its debt  a first in its history.

• Foreign reserves dropped so low that the government couldn’t afford basic imports.

• Long queues formed for fuel, food prices skyrocketed, and power cuts became daily routine.

• Massive protests led to political upheaval, including the resignation of the president.

• The country turned to the International Monetary Fund (IMF) and friendly nations for emergency help.

Main Causes of the Crisis

Several interlinked issues caused the crisis:

• Heavy external borrowing without strong returns

• Over-reliance on imports with little forex reserves

• Poor tax collection and sudden tax cuts in 2019

• Collapse in tourism and remittances due to COVID-19

• Printing excess money, leading to runaway inflation

Impact on Everyday Life

The crisis deeply affected Sri Lankan citizens:

• Inflation reached above 70%, making basic goods unaffordable.

• People waited hours in queues for fuel and cooking gas.

• Schools closed due to lack of power and transport.

• Many professionals, including doctors and engineers, left the country for better opportunities abroad.

• Healthcare and education systems were stretched to breaking point.

Impact on Businesses and Firms

Firms across the country from small shops to large corporations  faced massive disruptions:

Power and Fuel Shortages

• Frequent power cuts halted factory work and office productivity.

• Fuel shortages affected deliveries and transport logistics, increasing operating costs.

Inflation and Currency Issues

• The rupee’s devaluation made imports costly, hitting industries that relied on raw materials.

• Businesses struggled with rising costs for goods, services, and salaries.

Financial Pressure

• High interest rates made loans unaffordable.

• Many SMEs (Small and Medium Enterprises) shut down or laid off workers to survive.

Drop in Consumer Demand

• With households cutting spending, retail, fashion, food, and tech businesses saw revenue drops.

• The hospitality and tourism sector, once a major income earner, nearly collapsed.

Some Business Responses

• Some firms switched to digital services or reduced product lines to cut costs.

• Export-oriented businesses focused on earning foreign currency to stay afloat.

• However, recovery has been uneven  large firms survived better, while smaller ones suffered the most.

Steps Toward Recovery (2023–2025)

In response to the crisis, the government and international partners introduced several measures:

IMF Support

• A $2.9 billion bailout was secured from the IMF in 2023.

• This came with conditions like reducing subsidies, increasing taxes, and reforming state-owned enterprises.

Fiscal & Economic Reforms

• Tax policies were updated to improve revenue.

• Fuel and electricity pricing were adjusted to reduce government losses.

• The government encouraged exports, foreign investment, and tourism.

Debt Restructuring

• Sri Lanka entered talks with China, India, Japan, and private lenders to restructure foreign loans.

Current Situation in Mid-2025

Key Indicator	Status (2025)
GDP Growth	~2.5% – 3%
Inflation	~6–8% (down from >70%)
Foreign Reserves	Gradually recovering
Rupee Stability	Somewhat stable
Unemployment	High, but slightly reduced
Tourism	Slowly returning to normal

Recovery is visible, but still fragile. Many businesses are rebuilding cautiously, and people remain concerned about long-term stability.

Challenges

Despite signs of improvement, several key issues remain:

• High public debt is still a burden.

• The cost of living remains high for many citizens.

• Political trust needs rebuilding.

• Small businesses need more support and access to credit.

so Sri Lanka’s economic crisis is a strong reminder of the dangers of poor economic planning and global overdependence. However, it’s also a story of resilience. Through international support, tough reforms, and the determination of its people and businesses, the country is trying to move forward. The next few years will be critical in deciding whether the recovery becomes long-term and inclusive.