In a country, if the army has to be deployed at petrol pumps and examinations have to be cancelled due to the paucity of paper, then it can be easily understood how bad the situation has become there. All of you must have heard a lot about your neighbouring country Sri Lanka in newspapers and TV news these days. These days similar situations remain in Sri Lanka. The prices of basic commodities are skyrocketing due to inflation in this country, which is currently facing the worst economic condition since independence in 1948. The deep economic crisis has caused political instability in Sri Lanka. Even the mass resignation of the Union Cabinet did not stop his anger.
The economy of Sri Lanka is in crisis due to the serious problem of Balance of Payments. The current economic crisis is the result of historical imbalances in its economic structure, the International Monetary Fund’s (IMF) loan terms and the misguided policies of the Sri Lankan government.
Background of this economic crisis in Sri Lanka
When Sri Lanka emerged from the civil war in 2009, its post-war GDP growth remained at a high of 8-9% per year until 2012. But with declining global commodity prices, a slowdown in exports and an increase in imports, its average GDP growth rate fell to nearly half its rate since 2013.
The high budget deficit during the civil war and the 2008 global economic market exhausted its foreign exchange reserves, forcing Sri Lanka to take a loan of $2.6 billion from the IMF in 2009.
In 2016, Sri Lanka once again approached the IMF for a loan of $ 1.5 billion, but the terms of the IMF worsened the economic health of Sri Lanka. Over the past decade, the Sri Lankan government has borrowed large sums of money from abroad for public services.
The recent reason for Sri Lanka’s economic crisis
- The Easter bombings of 2019 killed hundreds of people in churches and large hotels. This resulted in a sharp drop in the number of tourists to the country, which had a huge impact on Sri Lanka’s foreign exchange reserves.
- Gotabaya Rajapaksa’s government, which came to power in 2019, had promised lower tax rates and wider concessions for farmers in its election campaigns. The quick fulfilment of these promises further compounded the problem.
- The government’s move to lower tax rates backfired and harmed the government’s revenue. Due to this rating agencies downgraded Sri Lanka to almost default level. This means Sri Lanka lost access to foreign markets.
- The Sri Lankan government then had to turn to its foreign exchange reserves to pay off the government debt. As a result, reserves fell to $2.2 billion this year, from $6.9 billion in 2018. This affected imports of fuel and other essentials and pushed up prices.
- The Sri Lankan government floated the Sri Lankan rupee in March, i.e. its price was determined based on the demand and supply of foreign exchange markets.
This step was taken to devalue the currency so that the loan could be obtained from the International Monetary Fund. However, the depreciation of the rupee against the US dollar made the situation worse for the common Sri Lankan people.
- The Covid-19 pandemic that came in the year 2020 made the situation in Sri Lanka from bad to worse. The economy of Sri Lanka is mainly based on tourism. The share of tourism in Sri Lankan GDP is around 12.5 per cent and this sector was the fastest growing in Sri Lanka in the pre-Covid era, but the COVID restrictions and the fear of the pandemic put a halt to tourism activities. At the same time, exports of tea, rubber, spices and clothing also suffered.
