Why Sri Lanka is facing one of its worst economic crises

  • Bankrupt Sri Lanka urges its citizens from abroad to send some home cash.
  • Fitch places 13 Lankan banks on rating watch negative.
  • Sri Lanka is found to default on 51 billion dollars as external debt.

The stable in island paradise. There is no food. 500,000 Sri Lankan’s have fallen into poverty in recent days. There is no fuel, and there are no medicines. Critical surgeries have been cancelled. Doctors say that the economic crisis may kill more Sri Lankan than the covid did. There are daily power blackouts and wide-scale protests on the street.

srilanka crisis
People stand in a queue to buy kerosene oil used in cooking stoves in Colombo on August 31, 2021 following Sri Lanka's declaration of state of emergency over food shortages as private banks ran out of foreign exchange to finance imports. Credit: AFP

The Lankan crisis has numerous explanations.

  • This is a problem in the country’s policy.
  • And then there is politics,
  • One fact is beyond Sri Lanka’s control which people call fate.
  • And the other cause is China. It is the root cause of many problems in Sri Lanka and elsewhere.
One by one let’s know all the points in detail: –

What is happening now is the result of years of Miss management.  You see there is a fundamental problem with Sri Lanka. It imports more than it exports. It spends more than it earns. There is a trade deficit. There is also a budget deficit. This double debt is a perfect cause for a big disaster. Sri Lanka’s response to these disasters has been disastrous, instead of trying to narrow down the deficit the country expanded its debt. Colombo borrowed heavily from countries and agencies. Today Sri Lanka’s debt to GDP ratio is 111% meaning it owes more than it produces.

In 2019 the Asian development flagged this problem, it said, “the country’s National expenditure is more than its national income, as well as its production of tradable products and services is not up to the mark.” 2019 was also the year when Rajapaksa was campaigning for presidential elections. Among his election promises were deep tax cuts, basically, you vote me to power and I’ll ensure you that you pay less tax. Well, how will the country make money then, the voters never asked and go to beyond never bother to warn. On November 19 he was elected to office with more than 52% of the vote and a series of drastic tax cuts followed, rating agencies raised an alarm they realized Sri Lanka state coffers will soon be bleeding and the country may soon run out of money. So, Lanka was downgraded to nearly default levels as a result investors fled the country and it became difficult for Sri Lanka to access international markets. But Gotabaya was not done, he made another blunder in April 2021 he banned all the chemical fertilizers, and why then good for health he said. Critics rolled their eyes and they realized the real problem was not health but a shortage of dollars, Sri Lanka was saving foreign reserves by banning the import of fertilizers. This decision was killing farm output. White rice is a staple in Sri Lanka, its production fell by 50%, around June 2021 Sri Lanka was forced to import rice, something like this had not happened in years.

srilanka crisis
Economic crises in Sri Lanka | AP Photo/Eranga Jayawardena

In July came the worse news: Sri Lanka banned the import of luxury goods and by now the country was scrambling to save dollars. Headlines of newspapers of Sri Lanka made it clear that Sri Lankans needed to brace for the storm. Well one could also say that Sri Lanka walked into this storm to an extent what’s happening now is Gotabaya and the company’s brand of politics backfiring. This Rajapaksa family’s return to power was only due to the support of Sinhala Buddhists. The Rajapaksa tried extra hard to not lose their support. In the last 3 years, Sinhalese sentiments were kept in mind while making decisions involving national and international affairs. From the Pro market approach, Sri Lanka turned to a welfare-driven mode. It invested in infrastructure because the Monks preferred this approach to development. Sri Lanka also was not interested in forming closer ties with India. The Rajapaksa moved closer to China. They always try to use bilateral debt to fund infrastructure and expand the Lankan military. Colombo bet on China to drive the Sri Lankan economy, China did send some money but it also spread a Wuhan virus. When Sri Lanka was never good with money it was China that insured Colombo goes bankrupt by 2019.

Sri Lanka’s tourism sector was already suffering, the eastern bombings had scared Europeans who would holiday in the island nation, then came the Wuhan virus when borders closed, tourists completely stopped arriving in Srilanka and due to low tourism revenue from tourism started decreasing drastically. Sri Lanka depends on tourism for 13% of its GDP, tourists are also a source of foreign currency. In 2020 Sri Lanka managed to welcome just 173000 tourists, in 2018 the number was 2.3 million and by 2021 SriLanka’s tourism revenue was down to 2.8 billion dollars as against 7.5 billion dollars in 2019. The Wuhan virus also hit remittances. Lankans abroad stop sending money so in late 2021 the revenue from tax had fallen. Agriculture production which accounted for 8% of the GDP had also fallen. Tourism revenue had fallen so had remedies and to top it all there was a rising pandemic and foreign agencies were not lending money to Sri Lank

what did Colombo do?

so it turned to its neighbours. In June 2021 Bangladesh loaned Sri Lanka 200 million dollars, and in February 2022 India loaned Sri Lanka 500 million dollars. Srilanka could not sustain themself. In March Gotabaya, Rajapaksa devalued the Sri Lankan rupee, the idea was to encourage remittances and qualify for a loan from the IMF (international monetary fund) but as the Sri Lankan rupee plunged against the dollar the people’s purchasing power took a plunge too.

At that time $1 was equal to 320 Sri Lankan rupees. The currency has fallen 32% since the beginning of this year. Back home the prices have soared inflation is up to 30.2 meaning the price of food has increased by more than 30%. A Coconut that would previously cost 50 Lankan rupees has now cost 91, and the prices of onions have gone up from 82 to 158 Lankan rupees for a kilo. The price of rice has increased 93% more, chicken costs 55% more, Lentils around 117% so, there is soaring inflation huge piles of debt bleeding foreign reserves and a tanking currency, everything that could go wrong with the countries economy has gone wrong with Sri Lanka, so much for all the politics and appeasement. Today Sri Lankans across ethnic lines are coming together every day to scream go to go, the monks have turned against the Rajapaksa.

How much money do you think Sri Lanka currently has?

let you people know that currently, Sri Lanka has less than 1.94 billion dollars this is as of March and that’s a little over the net worth of Kylie Jenner a 24-year-old American model but Sri Lanka needs to feed clothes and give security to 22 million people with 22 million money, it is also necessary to repay the loans. Sri Lanka has about 8.6 billion dollars in debt payments that are due this year. It was supposed to pay some 78.2 million dollars as interest payments on the 18th of April which was Monday. Colombo has announced that it would be defaulting, already in April, it announced a nationwide emergency. As we speak Sri Lankans are fleeing to India, as we speak Sri Lanka is in dire need of 20 billion dollars that’s how much it would need to import essential goods like food and fuel and to restart exports. The question is where will this money come from?….well Srilanka is hoping that the IMF will bail it out but all money comes with strings attached.  In Whichever direction the story heads there’s more pain stored for the people of Sri Lanka.

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