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Sri Lanka’s Economic Crisis

In this article we will discuss Sri Lanka’s Economic Crisis

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.

India’s Assistance

  • 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.

By competitiveworld27

Competitive World is your online guide for competitive exam preparation

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