@AdityaAlex10
New Delhi : Sri Lanka was one of the few nations in the South East Asian region that had a stable economy in the past decade. This stability was borne out of the period of calm that ensued from the civil war that engulfed the country from 1983 to 2009. However, since the year 2019, Sri Lanka has been facing the worst economic crisis in its history, which has further resulted in several political and financial crises for the country.
The country has been experiencing severe shortages of essential goods and electricity blackouts in households. Various factors have led to the creation of this crisis. The mismanagement of the foreign exchange in the country, the COVID-19 Pandemic, infamous policies in the agricultural sector, the 2019 easter bombings, and the 2022 Russian invasion of Ukraine are some of the main factors that have plunged the country into its worst financial crisis since 1948.
Tax cuts
Gotabaya Rajapaksa, the 8th President of Sri Lanka, and his cabinet were the causing factors behind the soaring budget deficits of the country. This was a result of the large tax cuts that further affected the revenue of the government and fiscal policies. With scarce funds for government expenditure, the Central Bank was left with no option but to start printing money in massive amounts.
Several ex-government officials like the former finance minister Mangala Samaraweera and the International Monetary Fund (IMF) advised the government to drastically reduce their spending, while simultaneously raising taxes and hiking interest rates. The Central Bank of Sri Lanka reportedly printed a record 119.08 billion rupees on 6th April. The high tax cuts and far less tax revenue led to an economic implosion, as warned by the IMF.
Foreign debt and Forex reserves
Sri Lanka’s foreign debt increased by 5 times from 2005 to 2020, building up from USD 11.3 billion to USD 56.3 billion. In the past few years, China has been its biggest bilateral lender, followed by Japan and India. Estimates show that Sri Lanka needed a total of USD 7 billion to balance its debt load in the year 2022.
However, in March 2022, the country had only USD 1.9 billion in reserves. Several experts and former government officials have faulted the ruling party for ill-advised tax cuts, gross mismanagement of funds for government expenditure, and tax cuts.
The tourism industry and COVID-19
The tourist sector in Sri Lanka is one of the largest contributors to the nation’s GDP. However, the 2019 Easter bombings significantly reduced the influx of tourists. The bombings took place on April 21, 2019. On an Easter Sunday, the capital city of Colombo saw three of its churches and hotels bombed in a series of suicide bombings. These suicide bombings were followed by several smaller detonations in Dematagoda and Dehiwala.
Before the tourism industry could fully recover, the COVID-19 surge saw a complete shutdown of traveling worldwide, which further impacted the GDP of the country. In 2018, the tourism industry accounted for 5.6% of the country’s GDP, amounting to USD 4.4 billion. However, in 2020, the earnings from the tourism sector saw a steep fall, accounting for only 0.8% of the GDP. This has resulted in a shortage of foreign currency.
Agricultural industry
The decision to ultimately shift to organic farming in 2021, by President Gotabaya Rajapaksa, oversaw the banning of inorganic fertilizers and chemical-based fertilizers. This resulted in a steep drop in tea production, calculating losses up to USD 425 million. The conversion to organic farming severely hit the businesses that produced fertilizers and pesticides and decimated their trading with foreign countries. These activities induced a severe economic crisis. There was a huge rise in protests against these measures and the soaring food prices.
Russian invasion of Ukraine
Russia is the second-largest importer of tea from Sri Lanka. Furthermore, Sri Lanka heavily depends on Russia and Ukraine for its tourism industry. The 2022 invasion of Ukraine by Russia further exacerbated the already damaged economy of Sri Lanka. Tea exports from Russia have significantly decreased, and tourists from both countries have noticed a drop due to the ongoing conflict.
Effects
Such mismanagement and failed policies have led to large scale unemployment in the country. The increased rate of unemployment has also resulted in a sharp rise in poverty. According to the statistics provided by the World Bank, the poverty rate based on a daily income of USD 3.20 grew from 9.2% in 2019 to 11.7% in 2020.
The same data has shown that food inflation peaked at 25.7% in February 2022, the most in over a decade. Furthermore. There was a countrywide shortage of fuels. This has led to long queues at petrol pumps.
Low levels of water in reservoirs due to less rainfall in 2021 have made hydroelectricity not a plausible alternative to fossil fuels. The capital city of Colombo has seen massive public outrage and protests against the Rajapaksa cabinet for their mismanagement of finances. The crippling condition of the economy has led to an increase in the rate of migrations among the natives to countries like India and the Maldives.
Conclusion
Countries like the US, China, and India have pledged to assist Sri Lanka to dig itself out of their crises. China is set to provide a total of USD 2.5 Billion in credit help. India has already provided USD 1 billion, upon which they are in further negotiations to provide another USD 1 billion in credit.
Furthermore, India had offered a USD 500 million credit line for gasoline purchases and a USD 400 million currency swap to Sri Lanka. Experts and ex-government officials in Sri Lanka have advised President Rajapaksa to effectively negotiate the balance of their payment crisis with the International Monetary Fund (IMF).
They have further advised that ensuring the safety and protection of tourists can help revive the tourism industry to support their GDP. The crisis in Sri Lanka has proven to be a reminder for other countries to better introspect their economic policies at regular intervals.
