The Economic Crisis of Sri Lanka



Sri Lanka has declared a state of emergency, a curfew has been declared across the island and social media websites have been banned. The foreign exchange reserves of Sri Lanka are depleting rapidly, which results in difficulty for the country to import essential consumer goods. In addition to the food shortage, people have to suffer through petrol and diesel scarcity too.


What happened to the Sri Lankan economy?

If a country has a low foreign currency reserve, it is difficult for it to import goods.


Sri Lanka's foreign currency reserves in the month of February were around $2.3 billion compared to January 2020 it had fallen below 70%. Sri Lanka's economy relies on imported goods even for basic consumption products but because of the low foreign currency reserves, it is becoming increasingly difficult to import these goods which lead to rapid inflation in the prices of these basic commodities in the country. In the month of February Sri Lanka witnessed 25% inflation. People are facing difficulties in purchasing necessary things and on top of it there's an electricity problem, a power crisis too because fuel is also imported from other countries. People are facing so many power cuts in Sri Lanka. The power Minister of Sri Lanka has directed the officials to turn off the street lights to save power.



Lanka Indian Oil Corporation (LIOC) has given 6,000 MT of diesel to Sri Lanka so that there will be some relief in the situation. Cooking gas is supplied only once a week and the price of a gas cylinder went up from LKR 3,000 to LKR 4,200. There are long queues outside fuel stations, the situation is so much worse that it has affected the newspaper and printing industries because of the shortage in printing material newspapers, which lead to minimizing the prints. School exams have been cancelled because of a shortage of papers.



Due to this food and economic crisis, people have started fleeing the country. The first set of refugees were found near Rameshwaram. They were a couple with their 4-month-old baby, another woman with her 2 children. They were rescued by the Indian coast guards. They were handed over to the police who then took them to a refugee camp. They said that they had paid LKR 50,000 to the fisherman, to drop them off on an island in the Indian water. Then there were other groups which illegally arrived on Indian shores at different locations in Tamil Nadu's Ramanathapuram district. Tamil Nadu is preparing for more arrival of refugees.


On 17th March, Sri Lanka finance minister Basil Rajapaksa signed a credit line of $1 billion with New Delhi. The line of credit, to be used to import essential items from India for their country so that their situation could be controlled a bit. A $500 million credit line was signed for fuel purchases earlier in the year. India is supporting Sri Lanka in every possible way, India did a currency swap of $400 million. But India is not the only country from whom Sri Lanka has asked for help; they approached China for help too. Sri Lanka is deep in China's debt, Sri Lanka has requested to restructure the debts along with it, and they discussed a $2.5 billion credit line from China. There has been discussion with the IMF and the world bank.


What are the reasons that Sri Lanka's condition is this now?


Around 12-13% of Sri Lanka's economy relied on tourism bases. In 2018 Sri Lanka was one of the world's top destinations for tourism. It was a record-breaking year for Sri Lanka, around 2.3 million foreign tourists visited Sri Lanka. In 2019 there were multiple bombings in the country which is now known as the Easter day bombing, three churches and 3 hotels were targeted across several cities, and 290 people were killed among which 45 were tourists which wrecked tourism.



In President Gotabaya Rajapaksa's presidential campaign he had promised to revive the economic growth in the country he also promised to cut down the value-added tax (VAT) to half. In 2019, he won the election and became president. With the logic that if tax will be reduced, people will consume more, the president cut down the VAT to half but three months later COVID-19 occurred. Because of the lockdown, people could not go outside and there was no increase in consumption and none in economic growth. The government had a huge revenue loss. The public debt of Sri Lanka kept on increasing. The public debt is projected to rise from 94% of GDP in 2019 to 119% of GDP in 2021. Gotabaya Rajapaksa decided to ban chemical fertilizers during the economical trouble in the country, there was the reason behind this decision to cut down the imports of synthetic fertilizers and pesticides imported into the country, after the ban within six months the government had spent $450 million to import rice. Sri Lanka was self-sufficient for rice production but due to the ban, it had to import rice along with that Sri Lanka also imported tea crops whereas Sri Lanka used to export tea crops to other countries.



Because of all these reasons, the value of the Sri Lankan rupee is deteriorating rapidly. At the beginning of the march, $1 was approximately about LKR 200 but it dropped to about LKR 300 because the value of their currency keeps on falling, and goods that they're importing are becoming more and more expensive. This causes more inflation in the country.


All the 26 ministers in the Sri Lankan government have resigned along with Prime minister Mahinda Rajapaksa who has resigned after a protest over the economic crisis. On may 13 Ranil Wickremesinghe was sworn in for a sixth stint as Sri Lanka's prime minister.


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