In this article, we will discuss Sri Lanka’s Economic Crisis. So, let’s get started.
Sri Lanka’s Economic Crisis
- Background: When Sri Lanka emerged from a 26-year long civil war in 2009, its post-war GDP growth was reasonably high at 8-9% per annum till 2012.
- However, its average GDP growth rate almost halved after 2013 as global commodity prices fell, exports slowed down and imports rose.
- Sri Lanka’s budget deficits were high during the war and the global financial crisis of 2008 drained its forex reserves which led to the country borrowing a loan of $2.6 billion loan from the IMF in 2009.
- It again approached the IMF in 2016 for another US$1.5 billion loan, however the conditionalities of the IMF further deteriorated Sri Lanka’s economic health.
- Recent Economic Shocks: The Easter bomb blasts of April 2019 in churches in Colombo resulting in 253 casualties, consequently, dropped the number of tourists sharply leading to a decline in foreign exchange reserves.
- The newly led government by Gotabaya Rajapaksa in 2019 promised lower tax rates and wide-ranging SoPs for farmers during their campaign.
- The quick implementation of these ill-advised promises further exacerbated the problem.
- The Covid-19 pandemic in 2020 made the bad situation worse –
- Exports of tea, rubber, spices and garments suffered.
- Tourism arrivals and revenues fell further
- Due to a rise in government expenditures, the fiscal deficit exceeded 10% in 2020-21, and the debt to GDP ratio rose from 94% in 2019 to 119% in 2021.
- Sri Lanka’s Fertiliser Ban: In 2021, all fertiliser imports were completely banned and it was declared that Sri Lanka would become a 100% organic farming nation overnight.
- This overnight shift to organic fertilisers heavily impacted food production.
- Consequently, the Sri Lankan President declared an economic emergency to contain rising food prices, a depreciating currency, and rapidly depleting forex reserves.
- The lack of foreign currency, coupled with the disastrous overnight ban on chemical fertilisers and pesticides, has sent food prices soaring. Inflation is currently over 15% and is forecast to average 17.5%, pushing millions of poorer Sri Lankans to the brink.
- Beginning January 2022, India has been providing crucial economic support to the island nation in the grip of a severe dollar crisis that, many fear, might lead to a sovereign default, and a severe shortage of essentials in the import-reliant country.
- The relief extended by India from the beginning of 2022 totals over USD 1.4 billion – a USD 400 currency swap, a USD 500 loan deferment and a USD 500 Line of Credit for fuel imports.
- More recently, India extended a USD 1 billion short-term concessional loan to Sri Lanka to help the country as it faces an unprecedented economic crisis.
- Crucially, any disillusionment in Sri Lanka with China eases India’s effort to keep the Lankan archipelago out of China’s ‘string of pearls’ game in the Indo-Pacific.
- It is in India’s interest to contain Chinese presence and influence in this region.
- To the extent India can extend low-cost help to alleviate the hardships of Sri Lankans, it should, however it must be done with due care keeping in mind that the optics of its aid matters too.