Abstract
The paper examines the fascinating case of middle-income Sri Lanka with pre-existing macroeconomic weaknesses hit by COVID-19. The pandemic created a public health emergency and an economic crisis in 2020, causing economic damage and dampening Sri Lanka’s development prospects. The evidence shows a sudden growth contraction, a steep rise in poverty, falling women’s employment, worsening macroeconomic imbalances, and high external debt levels rising. Rather than requesting early IMF assistance for its balance of payments problems, President Gotabaya Rajapaksa’s government opted for home-grown remedies including ultra-loose monetary policy, import controls, bilateral swaps and loans, and a ban on fertilizer imports. The unconventional policy mix temporarily mitigated economic scaring from COVID-19 and supported the economy. But the distortions introduced by prolonging this unconventional mix and the Russia-Ukraine conflict shock pushed Sri Lankan economy into external debt default, a worsening economic crisis and Rajapaksa’s resignation in 2022.
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