Sri Lankan Economic Crisis

Needless to say, that the nation is going through a political quagmire, violent civil unrest demanding the resignation of Gotabaya Rajapaksha, the President of Sri Lanka and a rapidly worsening humanitarian crisis at this moment. There isn't a single reason for this current crisis, but a multitude of them, which we shall explore in this article.

WHY DID THIS HAPPEN?

At its independence, Sri Lanka was ahead of many Asian nations, including China and South Korea, and was comparable to Japan on many indicators. The country performed remarkably well on many parameters compared to its South Asian peers. But on the darker side, all of this development was done using borrowed money from international markets and foreign banks. From 2010 to 2020, the country's debt more than doubled; in 2022, the debt owed by it was more than 135% of its GDP. In other words, the Island Republic borrowed more than it could produce to pay back.

According to a former Deputy Governor of the Central Bank of Sri Lanka, the country was a long way into an economic crisis by 2015 because of hot money, worrying borrowing practices, short-term thinking and monopoly of an FDI flow into a single sector. The government took measures to increase the revenue by increasing VAT from 11% to 15% and removing exemptions.

The 2019 terror attack caused a blow to the country's tourism sector, contributing one-tenth of its GDP, causing it to fall by 21%. In the 2019 elections, a new government under Gotabaya Rajapaksha was formed. The new government decided to cut tax rates which caused a lowering of the nation's coffers. The rationale behind this was the government wanted its people to buy more to balance supply and demand chains. To cover the government spending, the government began printing money in record amounts.

With 2020 came the advent of the Covid-19 pandemic. The international travel restrictions further doomed the tourism sector, which employed 3M people. In the May of 2021, the government decided to make the country 100% organic and banned the import of chemical fertilizers. The import of fertilizers costs the nation $400M every year. However, the problem was that the government took this measure overnight without ensuring adequate supply and demand of biofertilizers and awareness among the farmers. This led to crop failure and reduced agricultural output of the country, and $450M worth of rice had to be imported to feed the country of 2.2 crores. This has also caused a decline in tea production. Experts say that decline in tea production can put a revenue of $425M to stake. The government announced $200M to compensate for the losses incurred by the farmers.

Since most of the country's money for development comes from debt, the government is now required to clear it. But the failure of the agriculture and tourism sectors has led to the country's need to import essentials which have reduced the country's foreign exchange reserves and have rapidly depleted owing to this. Moreover, the ongoing Russo-Ukrainian war affects oil prices across the world, including Sri Lanka. Russia was also 3rd most significant buyer of Sri Lankan tea until it was put under sanctions by the West.

SYMPTOMS

The Sri Lankan currency has been perniciously falling in its exchange rate against the USD. The LKR (Sri Lankan Rupee) touched the 200 marks against the USD. The country is an imports-based country, unlike an exports-based country like China. A weak currency would ensure difficulty in the country's ability to buy essentials from other countries. But this is not it. At the beginning of March of 2022, 201LKR equaled 1 USD, but by April 9th, the number fell to 315 LKR.

On ground zero, the everyday life of Ceylonese people has been disturbed due to this, as the inflation rate is at an all-time high. Sri Lankans are paying hefty prices for fuel. The country needs $500M every month to pay for oil imports. The exams of students have been called off for now. Thermal power plants have run out of fuel. The country is experiencing a humanitarian crisis and civil unrest.

HOW DOES THIS AFFECT INDIA?

In summary, there is no doubt that most of the sectors will be affected badly on account of COVID19, but the high impact sectors in terms of risk primarily include travel, tourism, and hospitality; labour-intensive sectors like construction, transport, and manufacturing of non-essential items. From the discussion above and the news of the extension of lockdowns in several major countries, it can be concluded that we might experience a prolonged economic recession. Nevertheless, given all this, we also believe that the world will come out of this soon. Everything will get back to a ‘new’ normal in which there will be an inclination towards online services, better health and hygiene practices, and a strengthened health sector, among many others.

HOW IS INDIA HELPING?

India has provided a $2.5B credit now. India has also sent 270,000 MT of diesel and petrol to Sri Lanka, and talks are in progress for India to provide another billion-dollar credit. In February, New Delhi provided a short-term loan of USD 500 million to Colombo for the purchase of petroleum products through the Ministry of Energy and the Ceylon Petroleum Corporation on behalf of the Government of Sri Lanka. Three months before that, in November 2021, India gave 100 tons of nano-nitrogen liquid fertilizers to Sri Lanka as their government stopped the import of chemical fertilizers. Besides, RBI has extended a currency swap of US dollars 400 million and deferred payments owed by the Central Bank of Sri Lanka owed to RBI under the Asian Clearance Union worth several hundred million dollars. India's prompt assistance to the people of Sri Lanka at this hour has been appreciated by all sections of the Sri Lankan society (source: Print.com).

ENDNOTE

The Sri Lankan economy is not in good condition, and the plight of the Islanders is heart-wrenching. Experts say that there the way out of this rut is going to be long and painstaking. What happened in Sri Lanka serves as a lesson for other countries which focus on a single source of income, build everything with debt money, entertain rampant corruption and foreign dominance and take rapid decisions, no matter how noble, with little thought.

We’ll be back soon with another article. Till then, stay safe!

Views expressed are personal. All errors are our own.