The island nation of Sri Lanka is facing economic crisis which is started in 2019 and turned into worst economic situation in the country since its independence in 4th Feb. 1948. This crisis led to extreme level of inflation and reduction in foreign exchange reserves, price of basic commodities increment and shortage in the medical supplies.
Reason behind Crisis
The crisis caused by various of factors which includes Easter bombings in 2019, tax cuts, COVID – 19 pandemic impact, nationwide policy of the country to shift to biological farming or organic farming, money creation and economic mismanagement took place during successive government which results in sustained twin deficit – current account deficit and shortfall in budget.
Twin deficit represents that the total national expenditure of a country exceeds its total national income, which means that the production of goods in the country for trade and services are not adequate.
- The crisis get accelerated when Rajapaksa promised deep tax cut during the election campaign in 2019 which implemented just before few months of COVID – 19 pandemic which adversely affected Sri Lanka’s economy.
- Foreign workers remittances and Sri Lanka’s tourism industry also sapped by the pandemic.
These incidents derailed Sri Lanka’s economy and the foreign reserve of Sri Lanka reduced about 70 percent in 2 years.
- In 2021, Sri Lankan government decided to ban chemical fertilizers and this decision adversely affected the farm sector of the country and results in reduction in the production of crop.
Causes of economic crisis
1. Money creation and tax cuts
President Gotabaya Rajapaksa made huge tax cuts which adversely affected Sri Lankan government fiscal policies as well as revenue. These tax cuts included reduction in corporate tax from 28 % to 24 %, around 33. 5 % reduction in taxpayers, VAT reduced to 8 %. For covering the economic loss Central Bank of Sri Lanka started printing money in huge amount instead of IMF advice to stop money printing, IMF warned that money printing will lead to economic implosion.
Central Bank of Sri Lanka printed 119. 08 billion rupees in April 2022 and this money added to their financial market.
2. External debt
In 2019, foreign debt of Sri Lanka was around 42 % of the country’s GDP which rose in 2021 around 119 % of country’s GDP. At the end of 2022 Sri Lankan reserve came to 2. 3 billion US dollar while 4 billion US dollar are due to pay to debtors. Economic emergency was announced by the Sri Lankan government in September 2021 and situation worsen due to the increased food prices as well as pandemic effect on tourism which results in further reduction in the income of country.
3. Tourism
Around 13 % of GDP of Sri Lanka was obtained from tourism which was adversely affected by the Easter bombings in 2019 and pandemic.
4. Agriculture
On 2021 April Sri Lankan government announced that they will permit organic farming only and impose total ban on agrochemicals – based fertilizers and inorganic fertilizers which results in reduction in the production of tea and loss of 425 million dollar and reduce 20 % production of rice which led to import rice of 450 million dollar.
5. Russia – Ukraine war
Russia Ukraine war also negatively affected Sri Lanka because for tea exports Russia was the 2nd biggest market of Sri Lanka and huge numbers of tourist came from Russia and Ukraine.
Sri Lanka’s foreign debt
In February 2021, Sri Lanka was left with 2.31-billion-dollar reserve only while it has debt repayment of around 4 billion dollars, in which 1-billion-dollar international sovereign bond was also included which is maturing in July 2022.
IMF said that the foreign exchange reserve of Sri Lanka is insufficient for the debt payments in near term and public debt reached to unsustainable levels.
Help to Sri Lanka
Despite of rising risk Central Bank of Sri Lanka and Rajapaksha’s government resisted from seeking any help from IMF. After the Russian invasion in Ukraine and hike in oil prices, Sri Lankan government approaches to IMF in April 2022. Sri Lankan government also sought help from India and China, specially assistance on fuel.
500 million dollar diesel shipment credit line was signed in February 2022, with India. 1 billion dollar credit line was signed between India and Sri Lanka for importing essentials which includes medicine and food, after this Sri Lankan government seek for another 1 billion dollar from India.
China provided 1. 5-billion-dollar swap and 1. 3 billion syndicated loans to Sri Lankan government, and China is considering 1.5-billion-dollar credit facility for Sri Lanka with a 1-billion-dollar separate loan.
Impact of economic crisis on Sri Lanka
1. Shortage of fuel and electricity
The Sri Lankan economics crisis led to the decline in fuel, cooking gas and electricity consumption which results in shortages.
Sri Lankan Finance Minister Basil Rajapaksa urged authorities of government to switch off the lights of street for conserving the electricity. Shortage of cooking gas results in shutting of 1000 of bakeries. Long queues at petrol filling stations. Hike in oil prices globally worsen the fuel shortage. For conserving energy, power cuts are imposed on daily basis throughout the country. Government of Sri Lanka ordered military for posting soldiers at fuel and gas filling stations for ease in fuel in distribution and curbing the tension in queues at fuel station. Throughout March 2022 daily 7 hrs. power cut seen which eventually increases to 10 hrs. and reached to 15 hrs. in April. Newspapers stopped printing due to the shortage of paper and switched to e – papers.
2. Inflation
In February 2022, country’s inflation was 17. 5 %. Inflation for food was 24. 7 % and on non – food items year on year increase inflation was 11 % rate.
3. Education
In March 2022, Sri Lankan school postponed their mid – year examinations indefinitely due to the shortage of paper in country raised due to lack of foreign reserves for importing papers.
4. Health
Due to shortage of medicines all the scheduled surgeries were suspended, many hospitals reduced their large number of laboratory tests. Life – saving medicines were running out in state run hospitals. Red Cross Society of Singapore issued warning and declare the medical crisis of Sri Lanka as a “unprecedented humanitarian crisis”. Due to the shortage of new equipment old and used medical equipments are used by the doctors for treating the patients. It is reported that the doctors are performing medical surgeries with the help of light of mobile phones.
5. Tourism
Canada and United Kingdom warned their travelers about Sri Lanka’s current economic situation.
6. Exports
Due to the economic crisis in Sri Lanka, leading brands of textiles are diverting their attention toward India for placing their orders. Sri Lankan economic crisis increases overseas order for tea products and textiles in India.
Response of Sri Lankan government
Sri Lankan government rejected the existence of economic crisis and denied to seek help from IMF. President Gotabaya Rajapaksa blamed critics for the creation of crisis which was started by the central bank, opposition’s rating agencies as well as pandemic. In 2022 April, President accepted the crisis and stated the denial of IMF assistance as a mistake.
