Sri Lankan economy is dwindling at a fast rate

What Caused The Collapse Of Sri Lankan Economy?

This economic crisis started in 2019. In April, the Easter bombings resulted in the death of nearly 270 people, including foreign nationals. This incident hit tourism brutally, as it heavily depends on tourism to manage its economic situation. According to a report, tourism declined by 21% in just a year

May 31, 2022

Sri Lanka is facing its worst economic crisis since independence. Its economy is on the brink of complete collapse and people are facing adverse effects of galloping inflation.

At least 5 lakh Sri Lankan have fallen into poverty in the last few months.

There is a shortage of food, fuel and cooking gas. Critical surgeries are being cancelled as the hospitals have run out of life-saving medicines. Exams were cancelled because of a shortage of paper. There are 13 hours of a daily power blackout and mass protests on the streets.

Recently Sri Lanka ran out of petrol. People are saying it’s not just an economic crisis, it’s a humanitarian crisis.

But the question is, how did Sri Lanka fall into such a worse condition?

There is a problem with the country’s policy and politics, and factors that were beyond their control. Lack of foreign reserves and inadequate policies of the government are the primary causes of the ruin.

There has been a fundamental problem with Sri Lanka’s trade, it imports more than it exports. It heavily depends on the imports of even basic commodities such as food, papers, medicines, and fuel. Because of this, Sri Lanka is always in a trade and budget deficit.

Right now, the country is in massive debt, and to combat this, instead of narrowing the deficit, the country expanded its debt. Colombo borrowed heavily from the countries and the agencies. Today the debt to GDP ratio is 111%.

This economic crisis started in 2019. In April, the Easter bombings resulted in the death of nearly 270 people, including foreign nationals. This incident hit tourism brutally, as it heavily depends on tourism to manage its economic situation. According to a report, tourism declined by 21% in just a year.

In 2019, the Asian Development Bank raised the issue saying that the country’s expenditure is more than its revenue and its production of tradable goods and services is insufficient. In the same year, Gotabaya Rajapaksa was also campaigning for the presidential elections.

Among his election promises was a huge tax cut. In the presidential election, he received 52% of the vote. A tax cut policy was followed, and the VAT rate was reduced from 15% to 8%. This significantly affected the country’s revenue.

Furthermore, in April 2021, he banned all chemical fertilisers, saying that it was good for the health of the nation for the nation to become an organic farming nation. But the real problem was not the health concern but the shortage of dollars.

Sri Lanka was trying to save foreign reserves by doing so. This blunder led to a crop failure and the production of rice fell by 50%. For the first time in Sri Lanka's history, rice had to be imported around June 2021.

The current situation results from Gotabaya’s politics and policies. The return of the power of the family was made possible with the support of Sinhala Buddhists. Rajapaksa tried hard to not lose their support. In the last 3 years, Sinhalas’ sentiments were kept in mind when deciding on involving national and international affairs.

By 2019, the tourism sector was already suffering because of the Easter bombing. The covid-19 virus completely stopped the tourists and the revenue arriving from it. 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 1.73 lakh tourists, as compared to 2.3 million in 2018. By 2021, Sri Lanka’s tourism revenue dwindled to 2.8 billion dollars against 7.5 billion dollars in 2019. Covid also hit the remittances as the citizens abroad stopped sending money.

The Russia Ukraine war has also impacted the situation. Sri Lanka depends on the two countries for tourism and exports. It also imports half of its wheat and sunflower oil from them.

So, in late 2021, the tax revenue had fallen, and the agricultural production which accounted for 8% of the GDP had also fallen along with the tourism industry and remittances. And on top of it was the raging pandemic and the foreign agencies were not lending money to Sri Lanka. Columbo asked for help from its neighbours. In June 2021, Bangladesh provided a loan of 200 million dollars.

In 2022, India also extended a helping hand by lending 500 million dollars. But this could not help the economy stand. In March, Gotabaya Rajapaksa devalued the currency, which further reduced people’s purchasing power. Today one dollar is equal to 360 Sri Lankan rupees.

The currency has fallen 32% since the beginning of this year. Inflation is as high as 30.2%. Everything that could go with a country’s economy has gone wrong with Sri Lanka.

Today, people are protesting against the government and Gotabaya with the slogans “Gota Go Home”. The monks have also turned against the Rajapaksas.

As of March, Sri Lanka has less than 1.94 billion dollars to manage its economy, look after a population of 22 million people, and repay loans. Sri Lanka has about 8.6 billion dollars in debt payments that are due this year. The country is supposed to pay some 78.2 million as interest payments. Columbo has announced that it will be defaulting. Earlier in April, it announced a nationwide emergency.

Citizens have been fleeing to India and other countries. Sri Lanka has an acute shortage of foreign currency, rising inflation, and no policy to correct these measures. Its currency is depreciating fast and Sri Lanka urgently needs 20 billion dollars to restart the economy and for essential imports. Sri Lanka is looking up to the IMF for loan assistance. Sri Lanka is an example of how a wrong decision or policy could cause the complete collapse of a country’s economy.

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