Sri Lankan Economic Crisis explained

SRI LANKAN ECONOMIC CRISIS

Sri Lanka has defaulted on its debt for the first time in its history as it declared a state of emergency on 1 April and again on 6 May. The country struggled to keep itself afloat but the poor administration & incompetent politicians lead the nation into a dark age.

We will be learning about the present scenario, various factors that affected Sri Lanka's economy and why Sri Lanka went under, the indications in the past that were ignored and the way forward for Sri Lanka.

Sri Lanka is an island nation in the Indian Ocean, South-East of the Arabian Sea, South-West of the Bay of Bengal and separated from India by the Palk Strait, its capital: is Colombo & Sri Jayewardenepura Kotte.

PRESENT SITUATION

Sri Lanka had virtually dried out its Foreign Exchange Reserve (Forex Reserve) and lacked the means to replenish it. Inflation is as high as 21% as of March 2022, its debt amounting to 110% of its GDP and the Sri-Lankan Rupee valuing at 355 to one Dollar. Seeing the dire state of their country, people revolted against Mahendra Rajapaksa's government and demanded change in the administration of the country. The Island nation had requested a "Bail Out" from the International Monetary Fund (IMF) and Mahendra Rajapaksa had resigned from his position as PM and Ranil Wickremesinghe had been sworn in as the new Prime Minister of Sri Lanka.

As of May 20 (midnight), the Sri-Lankan government chose not to present an Emergency regulation in the parliament after which the country's state of emergency has been lifted.

CAUSES

1) Double Deficit: Currently the GDP, as well as the trading account of the nation, is in deficit, thus 'Double Deficit'. This was caused by the huge amount of subsidies that were being given while the country was not earning much from tax collection as well as trade or tourism.

2) Agriculture: Sri Lanka is widely known for the production of rice, but due to the lack of Forex reserves the government was unable to purchase fertilizers and pesticides. And to cover up the fact Sri-Lankan government even pushed its farmers abruptly toward organic farming. As a result, due to a lack of proper knowledge and training in organic farming practices, overall produce fell. Thus, for 1st time in history, Sri Lanka had to import rice, which put even more burden on its economy.

3) Family Politics: At the time both the President and Prime Minister were of the same family i.e. Mahendra Rajapaksa and Gotabaya Rajapaksa. It eventually resulted in abuse of power and an increase in corruption. 

4) Finance: The fall in Sri Lanka's currency, poor government finances, and a badly timed tax cut, all played a major role in crippling Sri Lanka's economy. Additionally, due to the depreciation of the Sri-Lankan Rupee importing goods became even more taxing on its economy.

5) Pandemic: "2020- The Year of Pandemic" had affected every nation on the globe, none were exempted from the destruction it brought along. Being an Island nation means a huge dependence on tourism and fishery. This pandemic practically killed the tourism sector and crippled the trade routes.

6) Foreign Elements: Mainly China, its debt trap policy works perfectly against Sri Lanka by continuous sanctioning of loans pushing Sri Lanka into a debt trap.

PAST INDICATIONS

First was in 2010 when Sri Lanka faced a sudden increase in its foreign debt. After that, the infamous decision of the Sri Lankan government to lease out Hambantota Port to China in December of 2017.

Lastly, in 2019 all the financial problems started to develop into an actual crisis under President Gotabaya Rajapaksa, it was still not as severe as it had gotten now and probably could have been prevented if steps were taken in time.

And then came COVID, finally pushing Sri-Lanka into a pitch-black pit.

AID BY NEIGHBORING COUNTRIES

India gave $500 Million to Sri Lanka to replenish its Forex reserves and $400 Million to purchase staple food & other necessary goods. A total of $1 Billion have been provided by India to Sri Lanka to assist the nation back on its feet. India even delivered medical supplies as humanitarian aid to Sri Lanka via INS Gharial under project SAGAR ( Security And Growth for All in the Region ).

SOLUTION?

The only way out is "Debt Restructuring". Meaning taking more loans to pay up the initial loan but at a lesser rate of interest than the previous loan. By restructuring debt, Sri Lanka will have more time to build back its economy and restore people's faith in the institution known as Parliament.

This is my understanding of the issue, do share your views in the comments.