- By 2009, Sri Lanka had developed a bad reputation for having a complex tariff structure, discouraging foreign trade, despite relying on imports for even basic necessities. Even as some relaxations were introduced in later years, this protectionist approach intended to help the domestic industry from foreign competition but ended up contributing to a foreign exchange crisis later. In fact, "saving foreign exchange" became one of the reasons for continued trade-unfriendly tariffs.
- Sri Lanka's economy, nevertheless, got a new lease of life after the end of the 26-year-long civil war in 2009. Keen to rebuild after the civil war, the country began focusing on large infrastructure projects. This became a double-edged sword – it helped boost the economy in the short run but triggered a 'debt trap.'
- Between 2009-2012, the island nation recorded an annual growth rate of over 8 per cent. Post which, the growth story continued for a few more years, albeit at a reduced rate. The growth, as noted by the World Bank, was largely driven largely by non-structural, short-term and non-tradable sectors like construction, transport, domestic trade and banking, insurance and real estate.
- A 2015 World Bank report called Sri Lanka "a development success story" for its economic growth and a significant reduction in poverty rates. To further consolidate its economic gains, in 2017, the government launched 'Vision 2025', which aimed to make Sri Lanka "a rich country by 2025".
- The post-civil war era saw a resurgence in tourism – one of the biggest forex earners and employment generators for Sri Lanka. While Sri Lanka recorded a 46.1 per cent growth – the highest in tourist arrivals in 2010, the island nation welcomed a record 2.33 million tourists in 2018.
- In 2019, the Rajapaksa government announced a significant tax cut, leading to a revenue loss of over $1.4 billion a year, per estimates. Restrictive tariffs contributed further to the trade deficit, with imports far exceeding exports. In May 2022, the trade deficit stood at $404 million.
- The trade deficit, the decline in tourism after the Easter Bombings and coronavirus pandemic, and falling remittances dwindled Sri Lanka's forex reserves. The tourism sector, in particular, was badly hit, with just 1.94 lakh arrivals in 2021. Tourism revenue declined from $4.4 billion in 2018 to just $633 million in 2021. Workers' remittances, another source of forex, declined to $5.49 billion in 2021, its lowest level since 2012.
- The 2021 decision to adopt organic farming and ban chemical fertilizers dealt a blow to the agriculture sector. While the government-linked the decision to public health, many suggest it was done to save forex reserves as chemical fertilizers are a key import good. The move was blamed for the declining yields and the consequent food crisis, which led to the government declaring an emergency last year.
- Sri Lanka's usable forex reserves reached their lowest point – $50 million – in May 2022 amid a spiraling external debt. According to reports, Sri Lanka will need at least $5 billion for essential supplies in the next six months. Low reserves have led to a shortage of essentials like fuel. Meanwhile, inflation too has risen sharply. While the headline inflation rose from 39.1 per cent in May to over 50 per cent in June, food inflation spiked from 57.4 per cent in May to over 80 per cent in June 2022.
- The depleting forex reserves and a rampant dollar have hampered Sri Lanka's ability to service its external debt, which is over $51 billion. In May this year, the island nation defaulted on its debt repayment – amounting to $7 billion – for the first time. As per a European Parliament report, "Japan held debt amounting to 4.4 per cent of Sri Lankan GDP, India 1 per cent, Korea 0.5 per cent, Germany and France 0.3 per cent each". Under scrutiny for its 'debt trap' diplomacy, Sri Lanka's debt held by China amounted to 6.9 per cent of the GDP.
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