Explained: Why has Sri Lanka imposed its longest power cuts in 26 years?

This is the longest cut since 1996 when Sri Lanka relied on hydropower for a majority of its electricity needs and the reservoirs ran dry.

While President Gotabaya Rajapaksa has asked the Treasury and Central Bank to ensure the import of fuel, the government has been taking several measures to deal with the shortage. Public offices have been asked to run without air conditioners and conserve energy.

The Commission, however, has called the ongoing crisis one of fuel and not energy. On Tuesday the regulatory body said, “What we are facing is not an issue of electricity capacity, but a foreign exchange crisis, as the country does not have enough reserves to import fuel.”

A Sri Lankan bus worker and auto rickshaw drivers wait to buy fuel at a fuel pump in Colombo, Sri Lanka, Wednesday, March 2, 2022. (AP Photo/Eranga Jayawardena)

The number of buses running has reduced due to the shortage in fuel, even as Gemunu Wijeratne, President of the Lanka Private Bus Owners’ Association, had warned on Saturday that public transport will collapse if petrol is not provided.

Hydroelectric dams, too, have failed at meeting energy requirements due to the ongoing drought.

Why can’t Sri Lanka pay for fuel?

The island nation has been reeling under an economic crisis for a few years now. In 2019, the newly-elected Rajapaksa government had nearly halved the value-added tax to boost spending. However, the move along with the pandemic-hit tourist sector, which the Sri Lankan economy heavily relies on, have left the country in a vulnerable financial position.

On February 23, the Bank of Ceylon released $35.5 billion to pay for a shipment of 40,000 tonnes of fuel which was kept waiting at the Colombo port for four days as the government struggled to find funds to pay for it. The Public Utilities Commission is now seeking assistance from the government to pay for three ships of fuel that arrived at the port last week.

According to data provided by the Central Bank of Sri Lanka on February 28, its foreign reserves dropped by 24.8 per cent to $2.36 billion in January 2022. This puts Sri Lanka in a precarious position as it has debt totalling over $7 billion to be paid in 2022.

The economy’s condition has raised fears that Sri Lanka might default on its loan and would have to look to the International Monetary Fund (IMF) for assistance – a move rejected by the government so far.

In fact, a Bloomberg report stated that Sri Lanka saw the fastest inflation in Asia in February, with consumer prices rising by 15.1 per cent from the previous year.

The Russian-Ukraine war can also worsen Sri Lanka’s economy as Russia is one of its largest importers of tea, while arrivals from the warring nations form a major chunk of its tourists. With the ongoing crisis and depreciated Ruble, declining imports and tourism from the region have hit Sri Lanka hard.

How has India helped?

Sri Lanka is relying on credit lines and currency swaps with its neighbouring countries such as India, China and Bangladesh for food and medicines and building up its foreign reserves.

India in February had sent 40,000 tonnes of fuel to the country to help allay its crisis. In January, India signed off on a $400-million credit swap facility and deferred an Asian Clearing House settlement of $515.2 million.

A Sri Lankan barber uses a newspaper to fan himself as he sits without work during a power cut in Peliyagoda, outskirts of Colombo, Sri Lanka, Wednesday, March 2, 2022. (AP Photo/Eranga Jayawardena)

On February 2, India had extended a line of credit of $500 million to Sri Lanka to buy petroleum products. “The Government of India (GOI) support for fuel imports by Sri Lanka from India, through the LOC of USD 500 million is in response to GOSL’s urgent requirement. This critical support comes in the wake of a virtual meeting between the External Affairs Minister of India and the Hon’ble Minister of Finance, H.E. Mr. Basil Rajapaksa on January 15, 2022, during which they discussed a range of issues,” the High Commission of India in Sri Lanka had stated in its press release.

Sri Lanka’s Finance Minister Basil Rajapaksa will also be visiting India to formalise an economic relief package for the country. He had earlier visited India in December 2021 to discuss Sri Lanka’s economic crisis.

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