Sri Lanka’s 81-billion-dollar GDP is about to implode. The government is on the verge of defaulting on its debts since it owes more than three times its foreign reserves. Many factors led to the current crisis, from debt traps to inflation. Debt in the billions due to years of accumulated borrowings, record inflation, and a lack of foreign currency makes it difficult for the government to pay for necessary things. The crucial sectors experiencing a sharp drop in demand due to the pandemic and alleged government mismanagement are just a few factors that have dragged Sri Lanka into an unprecedented economic crisis and a massive political upheaval.
Economic mismanagement, mounting external debt, decreasing foreign exchange reserves, a weakening currency, and rising prices characterize the continuing financial crisis in Sri Lanka, which runs from 2019 to 2022. Multiple compounding aspects have contributed to the issue, including tax cuts, money creation, a statewide policy to transition to organic farming, and incidents such as the Easter bombings in 2019 and the impact of the COVID-19 outbreak.
The South Asian republic has become a textbook example of a dual deficit economy, with national expenditure exceeding national revenue and imports exceeding exports. It is clear that unless the country accepts assistance, it will be unable to rebuild itself. It has asked the Asian Development Bank, India, and China for help.
We have discussed in detail the factors that have contributed to the economic crisis in Sri Lanka.
Shortage of basic amenities
Sri Lanka’s foreign reserves have been reduced by 70 percent due to alleged economic mismanagement by successive governments, with barely $2.31 billion remaining after debt payments of almost $4 billion. Sri Lanka’s reliance on imports for essential commodities such as sugar, pulses, and grains exacerbate its economic crisis. Rajapaksa said Sri Lanka could suffer a $10 billion trade imbalance this year.
Major Impact of pandemic
The COVID-19 pandemic, which provided the pretext for the current crisis, drained the island nation’s heavy reliance on tourism and foreign remittances. Sri Lanka’s tourism industry, which accounts for more than 10% of the country’s GDP, has been hit by a drop in visitors from three major countries: India, Russia, and the United Kingdom.
War crises (Russia-Ukraine)
Crude oil, sunflower oil, and wheat prices have risen dramatically due to the Russia-Ukraine conflict. India had to step in and deliver 40,000 MT of fuel under a $500 million line of credit. In the last 50 days, India has supplied over 2,00,000 MT of petroleum.
President Gotabaya Rajapaksa declared in April 2021 that Sri Lanka would allow only organic farming and prohibit the use of inorganic and agrochemical-based fertilizers. The decline in tea production as a result of the fertilizer restriction alone resulted in $425 million in economic losses, as well as a 20% drop in rice production in the first six months, reversing previously attained rice self-sufficiency and forcing the government to import rice at the cost of $450 million. The situation in the tea industry has been described as critical, with organic production being ten times more expensive and yielding half of what conventional farming produces.
FDI has dropped dramatically.
Under the current president, Gotabaya Rajapaksa, FDI has declined dramatically in the country. According to government figures, FDI was $548 million in debt compared in 2020 to $793 million and $1.6 billion in 2019 and 2018.
External affairs and Management
Sri Lanka’s administration, led by President Gotabaya Rajapaksa, implemented significant tax cuts that impacted government revenue and fiscal policies, causing skyrocketing budget deficits. The Central Bank began printing money at record levels to fund government spending. They disregarded IMF instructions to cease printing money and raise interest rates and taxes while cutting spending. Another IMF warning was that prolonged money printing would lead to an economic catastrophe.
According to a New York-based organization in 2020, Sri Lanka’s existing funding sources did not appear to be sufficient to meet its debt servicing commitments, which were expected to be just over $4.0 billion in 2021. “To tackle Sri Lanka’s ‘budgetary challenge’ in debt repayment, Treasury auctions must succeed,” according to the consultancy Bellwether. The ‘transfer problem’ of foreign exchange will be solved immediately if this is accomplished. Instead, the country is sinking further into debt due to failing Treasury bill auctions flooded with printed money. Sri Lanka would require a credible fiscal strategy and monetary policy to manage the debt issue and higher taxes to pay off debt, lower interest rates, and the openness of imports to allow taxes to flow back to the Treasury. Taxes can be rushed back to the Treasury because of interest rates and the onset of substances.
Impact on the people of Sri Lanka:
Due to shortages, the economic crisis has resulted in decreased usage of electricity, fuel, and cooking gas. To save electricity, Finance Minister Basil Rajapaksa has requested all government entities to turn down all street lights at least until the end of March 2022. As a result of cooking gas shortages, about 1000 bakeries have closed. In recent months, long lines have formed in front of gas stations. The fuel shortage was made worse by the rise in global oil prices. The authorities have imposed daily power outages around the country to conserve energy. The government instructed the military to station soldiers at several gas and fuel filling stations on March 22, 2022, to reduce tensions among people waiting in lines and facilitate fuel delivery. Four people died as a result of exhaustion and violence.
Due to uncertainty in planning the country’s economy, the Impact on the people of Sri Lanka is grave. The downfall has resulted in aggression among the people. They have come on the streets to protest against the government as they cannot receive the necessities needed for survival. It is dependent on the government’s actions and future economic planning that will stabilize Sri Lanka and rescue its people from this awful nightmare.