An analysis of Sri Lankan economic crisis | By Samad Raza Jaffry

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An analysis of Sri Lankan economic crisis 

SRI Lanka is struggling with an economic meltdown for the last two years. But today the situation has reached where Sri Lanka has witnessed a complete bankruptcy.

Sri Lanka currently does not have enough money to even buy the essential food items to feed its nation of 22 million people.

According to World Bank estimates, half a million people have plunged into poverty during this recent crisis.

People are on streets demanding a solution to the worsening economic crisis & difficulties and also the removal of the President of Sri Lanka, Gotabaya Rajapaksa as they claim that he was responsible for dragging the country into this worst economic crisis that the country ever faced in its history.

The crisis goes back all the way to 2019, when the current government came into power, they slashed the valuated tax to half in order to get popular support from the public.

As a result, tax revenues to the government came down. But this initiative, faced a lot of criticism from central bankers and other economists.

Similarly, they also cut down the prices of oil while it was going high in international markets.

Due to all these measures, the overall revenue of the country faced a massive setback. The tourism industry of Sri Lanka is considered as the backbone of its economy.

Tourists from all over the world contributes nearly US$ 10 billion to the country’s GDP. The state of emergency in Sri Lanka along with the Covid-19 pandemic has nearly crippled down its tourism industry where the revenue fell from US$ 450 million to US$ 2 million per month.

In 2021, Sri Lanka earned just US$ 634 million from tourism compared to US$ 3.5 billion in 2019.

This drastic fall in the revenue gave an extremely negative shock to the foreign exchange reserves of Sri Lanka which plummeted by almost 70% in the last two years.

The war between Russia and Ukraine has further worsened the situation of this industry as both countries are considered as the largest source of visitors for Sri Lanka.

The other reason considered for this economic crisis was the over nightly decision by the President to ban the use of chemical fertilizers and went into organic farming.

It is impossible for a country to go into complete organic farming in such a short span of time.

Thus, the decision resulted as disastrous for Sri Lanka and farmers from all over the country registered their protests against it.

The government has admitted that its foreign reserves have fallen to US$ 2.31 billion leaving it unable to buy essential food, medicine and fuel. Queues have stretched for kilometres around most petrol stations in recent months.

But it is noted that despite the fall in foreign reserves, Sri Lanka has still debt obligations of roughly $4 billion due in 2022.

Thus, takes the total external debt of Sri Lanka to US $ 51 billion. Furthermore, the Federal Reserve Bank of America has started to increase its interest rate.

Therefore, the appreciating dollar will only make it difficult for countries like Sri Lanka, Pakistan and other Southeast East Asian countries to do debt servicing and buy commodities in the US dollar.

Hence, it can have a negative impact on the foreign exchange reserves of these countries.Sri Lanka is located at a highly important strategic route in the Indian Ocean.

Around two-thirds of the world’s oil and half of the world’s container shipments pass through the country’s south.

This makes Sri Lanka an important player in the security of Sea Lines of Communication (SLC) in the Indian Ocean.

But now, Sri Lanka is passing through hard financial conditions and need immediate support.

This may be due to Sri Lanka’s abstention from voting on a resolution condemning Russia’s invasion of Ukraine made by United Nations General Assembly on March 22.

This issue may have worsen the situation to Sri Lanka. The only option available to the government is to go to the IMF program and seek loans.

This might help in overcoming short-term credits, restructuring the debt of Sri Lanka, and building confidence among foreign investors.

In the long-term perspective, the government should provide relief to farmers and mobilize them to start producing again because currently they are experiencing serious food crisis.

Therefore, it is the right time and opportunity for friendly countries to invest and support the financial institutions of Sri Lanka and thus win the hearts and minds of the public for times to come.

Similarly, India has also provided financial support in addition to 11000 MT rice. Pakistan, a traditional friend of Sri Lanka also needs to support Sri Lankan public in their difficult time.

Sri Lankan government has to undertake an economy-wide reform program that includes all types of government institutions, the central bank and the agriculture sector.

The government should bring all the relevant stakeholders including the opposition on one page in order to overcome the economic crisis in Sri Lanka.

—The writer is associated with the National Institute of Maritime Affairs.The views expressed are his own.

 

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