How war in Ukraine turned Sri Lanka’s economic crisis into a calamity

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MORATUWA, Sri Lanka – Life for Hasun Peiris began to unravel a year ago under the pull of powerful forces he didn’t understand.

Climbing food prices drained the 32-year-old woodcutter’s savings, and his family sold their truck. Hunger began to gnaw at their bellies, and they pawned off their gold. Then, after war erupted thousands of miles away in Ukraine, diesel grew more and more scarce in Sri Lanka, leading to daily power cuts starting last month. Now, Peiris has been forced to scale back his lumber shipments – and his diet. What money he has goes to buying eggs for his pregnant wife.

“I can’t remember the last time I ate chicken or coconut milk,” Peiris said, sitting inside his half-finished house while his five employees idly sorted matchwood in the yard. It was another afternoon wasted, with no electricity or diesel to power his tools and make a living. “I’m afraid,” he said. “I don’t know how to continue.”

Sri Lanka is mired in an unprecedented economic crisis brought on by mostly domestic factors: Years of foreign-debt-fueled government spending, badly timed tax cuts, policies that hurt crop yields and a precipitous drop in tourism during the coronavirus pandemic have hollowed out its foreign reserves. But Sri Lanka’s teetering finances were dealt another blow this year when war in Europe sent global fuel and food prices surging, turning the small country’s uphill economic struggle into something insurmountable.

Sir Lanka said Tuesday it needed to suspend international debt payments to save its dwindling dollar reserves for importing fuel and food, both of which are in short supply here, contributing to a devastating inflationary spiral. Over the past six months, central bank data shows, market prices for rice and wheat have doubled. Diesel prices have shot up 60 percent, leading to widespread shortages and blackouts that have fanned protests across the country demanding President Gotabaya Rajapaksa step down.

“Sri Lanka would be in crisis even if you didn’t have a war in Ukraine, but it’s compounding everything,” said Alan Keenan, an analyst at the International Crisis Group consultancy. “This is the Ukraine effect: a credit line for fuel you thought could last two months now lasts one. Even if you get a bailout, you’re buying less food, less fuel, less medicine.”

“Now,” Keenan added, “is a terrible time to be crashing your economy.”

Last week, the United Nations Food and Agriculture Organization warned that global food prices had risen to the highest level since it began tracking them in 1990, partly due to the war in Ukraine, a major wheat producer. Inflation, the agency’s chief said, will impose “extraordinary costs on global consumers, particularly the poorest.”

As Sri Lanka’s foreign currency reserves fell dangerously in February, the country negotiated a $500 million credit line with India to import oil, which not only powers transportation and industry across the island but also accounts for 40 percent of its electricity generation. That credit line will already be exhausted by this month, said finance minister Ali Sabry, who is seeking more emergency financing from India and other governments.

“Our import bill for essential fuel has almost doubled, particularly with the unfortunate situation in Ukraine,” Sabry said in an interview this week before his ministry announced it would default on nearly $50 billion in foreign loans to prioritize imports.

“Wheat prices have gone up. Freight prices have gone up. It’s all affecting our reserves in a big way,” he said. “Even the United States has high inflation. Everybody is suffering, more or less.”

So far, Sri Lanka’s protests have been mostly made up of young, middle-class professionals who grew up in a decade of relative prosperity, as the nation emerged from decades of civil war, expanded its manufacturing and white-collar jobs, and looked poised to become the next Asian success story.

In the past year, these workers have seen their purchasing power and their middle-class futures evaporate. Families gather nightly in places such as the downtown waterfront of the capital, Colombo, to chant slogans against Rajapaska and honk their horns in protest. The atmosphere is festive, but frustration is mounting.

Jay Tissera, a 28-year old graphic designer, took a break from protesting outside the presidential office on a recent afternoon and smoked with his friends – a computer programmer and a journalist – in the shadow of a seaside tower that boasted $1.4 million apartments with sweeping views of the Indian Ocean and interiors designed by a French architect.

“They point to this as development,” Tissera said, pointing up. “But you see, for years the people haven’t developed.”

So far, these demonstrations have been largely peaceful, but officials in both the ruling party and the opposition are worried about where they will lead. They fear a deeper rage could erupt if the poor, who are working overtime just to survive and have not joined the protests en masse, are driven to the streets by hunger.

Eran Wickramaratne, an opposition politician and former state minister of finance, said the government needed to import more food immediately. Last week, India began shipping 40,000 tons of rice to Sri Lanka. But Wickramaratne said it wasn’t enough.

“Those protests are now calm and collected but they might quickly take a different direction,” he said. Wickramaratne shook his head, then waved away the thought. “I don’t even want to imagine it,” he said.

For many across the capital and on its outskirts, desperation is already setting in.

Outside a busy hospital, Pasinda Fernando, a young pharmacist, confessed with shame and anger that he was beginning to hoard heart medication for his most loyal customers because of a nationwide shortage in imported medicines. “I’m trying my best to reduce prices but the customers are suffering,” he said. “Only when we have a change in government will things get better.”

In another neighborhood, at the front of a line for gasoline that stretched three blocks, K.P. Wimalavathrne, a 61-year old rickshaw driver, said he was eating nothing except five balls of rice noodles a day and sleeping in his back seat. With so much of his time spent waiting for gasoline, “how else can I make money?” he asked, drawing murmurs of sympathy from the crowd of sweaty rickshaw drivers, all of whom had stood for more than two hours to fill up a small jerry can or soda bottle.

Down a coastal road, a group of fishermen were fuming at their elected leader about government officials sneaking into their diesel depot at night to fill up their own vehicles.

Fuel was practically out of reach already, said one of the men, Joseph Anthony Silva. The smaller skiffs lining the pier sit unused, with kerosene unobtainable. Ten-day fishing trips in the bigger boats have been cut to three days because diesel is so expensive, he said. Three meals a day have been cut to two.

Silva fretted about how to feed his family of five and pay loan sharks who he, and other fishermen, are increasingly indebted to as the community has floundered over the past year. Silva owes about $750, or several months’ income, at 20 percent interest, he calculated.

“The loan sharks’ business is so good they’re now open 24 hours a day,” interjected Linton Fernando, another fisherman with growing debts. “They come to our doors and shame us by taking away furniture and gold.”

If fuel and food prices don’t fall, the two men agreed, they would be ruined. As they spoke, a train emerged from a dense palm grove and rumbled across the inlet. Silva nodded toward the barreling locomotive. His mood darkened, his anger folded into despair.

“Soon, there will be no way out of debt,” he said. “No way except death.”