Sri Lanka's Economic Crisis and How it all began?

Our neighbour is bleeding. Poor governance, corruption and a lot of foreign debt. The story of Sri Lanka is heart wrenching, unsettling and disruptive. Sri Lanka’s annual inflation was at 18.5% in March 2022. 
What is the country’s condition today, and how did it reach such a diminutive state? We shall find out today. 
As distressing as the below facts are going to be, this is the truth of a country that has fallen into a debt trap, or should we say debt-trap diplomacy (if you know what I mean!)? And now, it is the people who suffer. While you read this from the comfort of your air-conditioned room, people in Sri Lanka stand in queues that extend 2-3 km long for food and fuel. 

Sri Lanka Today

A state of emergency has been declared.
All social media websites have been banned to stop the spreading of misinformation. 
Curfew has been declared across the island.
Thousands of Sri Lankans took to the streets to protest against the miserable situation.  
Even the riches do not have food to eat. 
The country’s fuel prices have skyrocketed. 
Exams have been cancelled in schools because the country cannot afford to import paper. 
Out of 24 hours a day, there is a power cut of 20 hours. 
People are desperate to leave the country, and many have already fled.   
The complete set of 26 cabinet ministers has resigned.

As of Feb 2022, Sri Lanka’s foreign currency reserves stand at around $2.3 billion,  compared to India’s $622.275 billion. For a country, when their foreign currency reserves are very low, it makes it very difficult for them to import goods. Sri Lanka relies on imports for the most basic things, such as sugar, salt, cereal, dairy products, pharmaceuticals, cotton, iron and steel, tea, and coffee.  A week ago, the price of a kg of rice was ₹290, and that of sugar is ₹240. 
Sri Lanka has a debt of $4 billion to be paid this year. The country’s reserves would sustain just about a month’s imports. 

Should we now travel a little back in time to learn how it all started?

How did the Sri Lankan crisis start?

There is no single specific reason or incident that caused/triggered this. There are multiple reasons that led to the economic crisis of Sri Lanka, that it is in today. Let’s learn about all those causes today. 

👉Foreign debt 
In between the years of 1948 to 1955, Sri Lanka had rich cultivation of rubber, tea and coconut. So much so that they exported most of it. They constituted 90% of Sri Lanka’s export. The country tried but failed to diversify. In 1955, prices of rubber and tea declined drastically in the international market, and so did the revenue from the exports. This was the first instance when the country faced a foreign reserve crisis. 

In 1977, the revenue of the government was not enough to cover for the welfare schemes it had announced to please the people of the country. So, the government took loans to fulfil them.

As of today, 83% of the Sri Lankan government’s revenue goes into paying off debts. According to a CNBCTV18 report, the country accrued a foreign debt of $35 billion in 2021. 

The IMF has bailed out Sri Lanka 16 times till today. Let us hope that it does the same for the 17th time. 

👉Tourism took a hit
Sri Lanka was a happy prospering country that attracted a lot of tourists, and the country has been a gracious host. Till 2019, the tourism sector contributed 12-13% to Sri Lanka’s GDP. But then, on a fateful day of April 2019, the Easter Day bombings happened. This was executed by Sri Lankan citizens who were associated with a local Islamic terrorist group. 

3 churches and 3 hotels were targeted by them. 269 people died on that black day. But amongst those, there were 45 people who were of foreign nationality. Now, you can obviously understand how it would have impacted tourism.

This led to violence against Muslims on a very large scale. Religious tensions heightened. And to the naked tourist eye, it became obvious how unsafe a tour to Sri Lanka was. 

👉President’s promises
The President of Sri Lanka, Gotabaya Rajapaksa, in his presidential campaign, promised that he would cut down the Value Added Tax to half. This was done with the motive of increasing consumption among the citizens, since reduced taxes would encourage increased spending. When he won, he put his money (or money of the people of the country) where his mouth was. But the timing was ill-fated. Just after three months of execution of this, Covid happened. 

People were under lockdown, and some started losing their jobs. This negated the motive of increased consumption and the reverse happened. Due to the cut down in taxes, the government saw a major revenue loss. 

👉Covid-19. 

Lockdowns, job losses, labor market deteriorations, the covid-induced new-poor population, increase in the poverty rate worsened the already deteriorating state of the country.

👉100% organic farming

To add to all of it, the President decided that the whole country’s agriculture be turned organic, meaning no use of any chemical fertilizers. This was to be done over a period of 10 years. But on a sudden day, the government banned all synthetic fertilizers and pesticides. This drastically impacted the production volume, and the efficiency got reduced by 20 to 30%.  

Today, when we say that Sri Lakans do not have food to eat, it is because of this. They cannot grow in their own country. And they cannot import enough for they have low foreign reserves.

👉Food Mafia

The government also believes that the country’s Food Mafia has started to hoard food to inflate the prices. The black market has come to action for the most basic food items like rice, sugar, pulses. 

👉The Russia-Ukraine War

The war has affected not only tourism (as if it wasn’t already pathetic), but also the country's imports. Around 30% of foreign tourists in Sri Lanka were from Russia, Ukraine, Belarus, and Poland. But the war took that away. Russia and Ukraine were also major importers of tea. You can guess what happened to that!

Conclusion

The Sri Lankan government sought aid from the US, India and China. India has extended a $1billion line of credit for the supply of essential commodities already. And financial assistance of $2.4 billion has also been provided by our country since January. 

Let’s just hope that the “Go Gota Go” by Sri Lankan protesters comes to fruition. 

Till we meet again.