Decoding Sri Lankan Economic Crisis – Lesson to Learn

 

1. The civil unrest in Sri Lanka has escalated to unprecedented levels over the past few days as the protests against the country’s government over the economic crisis continue.

2. People in Sri Lanka have been queuing up outside fuel pumps and grocery stores to buy essentials, which are in scarcity in the country. Blackouts round the clock and deadly fights over essentials have become a norm lately.

3. The incumbent Finance Minister Ali Sabry told parliament in early May, that it may take two years for the country to emerge from the crisis, which leaves people in prolonged uncertainty.

Reasons for the worst economic crisis since independence? 

1. Sri Lanka is a classic twin deficits economy, said a 2019 Asian Development Bank working paper. Twin deficits signal that a country’s national expenditure exceeds its national income, and that its production of tradable goods and services is inadequate. Trade deficit is $10 billion.

2. The government’s decision to ban all chemical fertilisers in 2021, a move that was later reversed, hit the country’s farm sector badly. For an island nation, dependent on agri-exports, and with more than 60 per cent population directly or indirectly dependent on farming, the move was economically suicidal.

3. The country’s lucrative tourism industry and foreign workers’ remittances were sapped by the pandemic. The credit ratings agencies moved to downgrade Sri Lanka and effectively locked it out of international capital markets.

4. Deep tax cuts promised by Rajapaksa during a 2019 election campaign were enacted months before the onset of COVID 19. Taxes were brought down to just 8% of GDP.

5. For a nation largely reliant on imports of energy supplies, food grains, essential commodities, and medications, having a foreign reserve of just $2.31 billion (Jan 2022) is a financial nightmare for the government.

6. The country’s inability to pay for basic necessity items on account of a lack of foreign exchange, lead to acute shortages and pushed up prices to record highs.

7. The country’s foreign reserves have now dropped below $50 million. This has forced the government to suspend payments on $7 billion in foreign debt due this year, with nearly $25 billion due by 2026 out of a total of $51 billion.