Sri Lanka is going through the toughest economic crisis since its independence in 1948. There is a series of constant blows to knock down the economy, and faulty government policies have added to the woes of the nation. As a result, the prevailing conditions of Sri Lanka look very pathetic due to Huge mountains of foreign debt, a series of lockdowns, surging inflation, a lack of petroleum supply, a drop in foreign currency reserves, and currency devaluation have all hampered the country’s economic growth.
The economic crisis and its causes
The very slow growth.
According to data from the statistics department, Sri Lanka’s economy grew at a slower-than-expected 1.8 percent in the fourth quarter of the fiscal year 2021, bringing total year growth to 3.7 percent. However, the Sri Lankan central bank forecasted a 5% increase for the year.
Countries such as India, China, and Bangladesh have moved in to assist Sri Lanka in dealing with this situation. It has also asked the International Monetary Fund for financial aid (IMF).
When and how things went wrong
The economic conditions of Sri Lanka were not so good even before the pandemic, and Lockdown brought it to the ground. It shattered the informal sector badly, which is almost 60% of the nation’s workforce. The Mahinda Rajapaksa administration struggled to pay for basic imports following a 70% decline in foreign exchange reserves over two years, which sparked a currency devaluation. As the government prepares for talks with the International Monetary Fund over its ability to pay $4 billion in foreign debts this year, including a $1 billion international sovereign bond maturing in July, fuel is in short supply, food and essential goods prices have risen, and protests have erupted.
According to Reuters, Sri Lanka has only $2.31 billion in reserves. However, the IMF has stated that it is willing to crisis assist. The Sri Lankan government is scheduled to hold discussions in April, but the World Bank has issued a caution. According to a report released on Friday, the island nation is facing “solvency” concerns as a result of threats from an unsustainable debt level, despite the fact that the IMF provided $787 million in pandemic assistance to Sri Lanka in August.
What led the Sri Lankan economy to the worst condition
Sri Lanka relies heavily on foreign commodities. It imports petroleum, food, paper, sugar, lentils, pharmaceuticals, and transportation equipment, among other things. The country cannot purchase (import) certain commodities due to a lack of foreign currency. Because of a paucity of printing paper, the administration was forced to postpone exams for millions of students. Here are the five factors that have had a significant impact on Sri Lanka’s economy:
- The epidemic has had an impact on the country’s tourism industry, which accounts for 10% of GDP. Because of the currency crisis, numerous countries, including Canada, have lately imposed travel restrictions on their nationals visiting the island republic. Other countries’ advice has a negative influence on business. The largest sources of inbound tourism to the island nation are the United Kingdom, India, and Russia.
- The government’s decision to ban the use of chemical fertilizers in order to transition agriculture to 100% organic has an economic impact. According to experts, this legislation would have disastrous agricultural development because organic farming cuts productivity by half. Furthermore, the rising cost of basics such as rice and sugar, purportedly due to “food mafia” hoarding, has worsened problems.
- The availability of foreign exchange was impacted when foreign exchange reserves declined from much more than $7.5 billion in 2019 to around $2.8 billion in July 2021, raising the number of funds. Sri Lankans had to pay to obtain the foreign exchange needed to import goods. As a result, the Sri Lankan rupee has fallen.
- A high foreign debt burden of around $5 billion with China alone contributes to the current predicament. In 2021, Sri Lanka will repay a $1 billion loan obtained from Beijing. It also owes a significant sum to India and Japan. The country’s foreign currency reserves were under $1.58 billion, down from $7.5 billion when Gotabaya Rajapaksa assumed charge in 2019.
- Sri Lanka’s dependency on imports for critical items. The Item is sugar, pulses, cereals, and medications has exacerbated its problems. It lacks foreign currency to cover import expenses.
Other factors leading to the economic crisis condition
The economic crisis is commonly regarded as the result of mismanagement of government finances, ill-advised tax cuts, and the impact of the COVID-19 pandemic. Unfortunately, the situation in Ukraine has not yet helped either; petrol prices have risen by 40% in a week.
Essentially, Sri Lanka is severely in debt; according to some estimates, it owes over 119 percent of its GDP, implying that it has borrowed more money than it can create through goods and services. On the other hand, Tourism was already on the downturn following a spate of terrorist explosions in Colombo in 2019. Moreover, the COVID-19 outbreak aggravated the issue. As a result, the economy’s foreign currency-earning sectors were decimated, resulting in a drop in the inflow of foreign currency used to make import transactions.
President Gotabaya Rajapaksa, who took office in 2019 pledging rapid economic growth, faces a huge task due to the economic situation. During his campaign for president, Rajapaksa promised to lower the 15% VAT by nearly half and eliminate certain other taxes in order to increase consumption and GDP. However, the tax cuts resulted in a loss of crores of rupees in tax receipts, putting additional strain on the already overburdened economy’s public finances.
In the words of Economy Experts on economic crisis
Some experts suggest Sri Lanka’s debt should be restructured and repaid over a three-year period. This will save valuable cash while also easing the strain on Sri Lankan citizens who are experiencing shortages of imported items such as milk powder. Fitch, a rating agency of UAS, forecasts that, in addition to the $4.5 billion central government debt, the Sri Lankan central bank will need to arrange for $2.4 billion to assist state-owned and private enterprises in the country in meeting their debt obligations in 2022.
The country also requires roughly $20 billion in imports for necessities like fuel, food, and intermediate items for exports. Reserves had been at a critical level for months. It increased to $3.1 billion at the end of December, thanks to a $1.5% increase.
The method may be effective, but the cost to Sri Lankans will be significant for some time. Over 350 “non-essential” commodities, including milk, oranges, and household appliances, are now prohibited from importation. And the small supply of remaining commodities is becoming more pricey by the day. Cooking gas, for example, is nearly three times more expensive than it was just five months ago. Securing IMF and World Bank loans and short-term financing from China and India may help stabilize Sri Lanka’s economic and financial predicament. However, with protests intensifying and the austerity measures needed by lenders likely to be unpopular. The administration may struggle to stay in power for long.