All you need to know about the Sri Lankan economic crisis

Sri Lanka, known for its rich bio diversity, tea plantations and exquisite natural beauty is now all over the news for an altogether different reason. The country is facing an economic crisis of a magnitude that it is going to reserve a special spot in the history of all economic crises.

The crisis is deepening further each day in line with enormous shortage of food and fuel. In response to such shortage, the citizens of the country are expressing outrage in the form of protests against failed governance and corrupt bureaucracy. The prices of even the basic commodities are sky rocketing owing to vastly limited supply burdening the common people of Sri Lanka.

The foreign currency reserves are at an all time low making it even harder to import essential commodities such as sugar, cereals, pharmaceuticals, etc. The reserves have fallen drastically in the past few months and now stand at just 2.31 billion dollars. Sri Lanka is also entrapped in massive debt and has to repay about 4 billion dollars of debt this year. As a result, the common people are suffering immensely with acute power crisis, cooking gas supply being provided to them once a week, school exams being postponed due to shortage of ink and printing materials and paying excessively for feeding themselves.

One thing that needs attention here is that a crisis of this volume cannot happen in a day or a week or a month. It was budding since years and a number of factors contributed to it. A few of the major reasons of the crisis are listed below.

1. Sinking Tourism: Sri Lanka is one of the economies which is highly dependent on tourism. It was one of the top destinations for tourism up until 2018. In April 2019, there were multiple bombings in the country depicting a negative image to the outside world thereby hampering its tourism industry. The situation further worsened when the Covid-19 pandemic emerged in March 2020 leaving a terrible impact on the same.
2. Tax Cut: The current president, Rajapaksa Gotabaya had declared in his presidential campaign in 2019 that the Value Added Tax (VAT) will be reduced by half in his regime. Keeping his promise, the government reduced the VAT from 15 per cent to 8 per cent in December 2019. Government’s motive behind such tax cut was to encourage spending leading to economic growth. However, three months later, the Covid-19 pandemic hit and the spending in fact reduced which ultimately increased the revenue losses by the government.
3. Ban on fertilizers and pesticides: The Sri Lankan President is an advocate of organic agriculture which however, caused more harm than benefit to the economy. The government rolled out a new agricultural policy in April 2021 implementing a complete ban on the usage of chemical fertilizers and pesticides. The decision was taken to cut the imports of fertilizers and pesticides and become the first country to fully adopt organic farming. The sudden decision depleted the agricultural produce significantly further leading to rising imports of rice and tea among other food commodities. The imports reduced the foreign currency reserves putting pressure on the economy.
4. Hoarding: Another alleged reason for worsening of the food crisis in Sri Lanka is hoarding. Rumour has it that the Food Mafia is hoarding the essential commodities which has added to the situation of panic among people. It has also led to massive inflation making it even harder to survive in the country.
5. Foreign Debt: Sri Lanka as a country has always been in hefty debt since 2010. The public debt was projected at 94 per cent of the GDP in 2019. The debt has magnified and was estimated at 119 per cent of the GDP in 2021. The crisis will only amplify this debt wherein Sri Lanka is asking credit from countries as well as other international institutions. Therefore, Sri Lanka is trapped in this vicious cycle of debt which will take years to pick up.

All these factors have collectively led to a severe depreciation of Sri Lankan rupee making the imports even more expensive. One US dollar is now worth 315 Sri Lankan Rupees (As on 9th April, 2022). A lot of people have started fleeing from the country and have started coming to India as refugees. A total of 26 ministers have resigned post protests by the citizens. However, countries such as India and China are coming to the rescue by offering monetary as well as non-monetary help in their owns ways. Sri Lanka has also appointed an advisory panel consisting of economic and fiscal experts so as to combat the ongoing crisis and to seek help from International Monetary Fund. In spite of all this, recovery is still far-sighted and Sri Lanka will take some time to come out of this catastrophe.