Sri Lanka’s Economic Crisis
Sri Lanka is facing its worst economic crisis since independence, with long queues in front of petrol stations, steep rise in prices of essential commodities and frequent blackouts.
Many Sri Lankan nationals are also fleeing to other countries to escape the crisis.
What lead to Economic Crisis in Sri Lanka?
Problem of Foreign Reserves or BOP
- Simply put, A Balance of Payments (BOP) arises when a country imports more than its exports. Also, a crisis deepens if the outflow of money is more than the inflow of money
- TheSri Lankan economy is crumbling due to an acute shortage of foreign currency or a balance of payments (BOP) crisis and the fast depreciation of the Sri Lankan rupee against the dollar.
- As the country is heavily dependent on imports including petrol, diesel, food, sugar, lentils, paper, medicines etc. but reduced forex reserves have negatively impacted the imports.
- Recently Prime Minister admitted that the country is expected to have a trade deficit of $10 billion.
- The fall in Sri Lanka’s FDI also contributed to declining of foreign reserves
- In fact, the major export destinations of the country (China, EU nations) had issues with trade during the pandemic which also fuelled the crisis.
Lockdown Hits Tourism Industry
o The tourism industry has been bringing much of Sri Lanka’s forex but Covid-19 induced restrictions brought a drop in tourism which contributed 10 % to its GDP.
However, the 2019 serial bomb blasts in Colombo already impacted the tourism sector of the country.
Failed Policy of Organic Farming
o In its aspiration to become the world’s first 100-percent organic farming nation, the Sri Lankan government banned the import of agricultural chemicals and fertilisers last year.
o The island nation tried to reduce its dwindling foreign currency reserves but it emerged as a big blunder.
o The ban on fertilisers resulted in crop failure and massive protests by farmers against the government.
o According to a report, over one-third of Sri Lanka’s agricultural land was left fallow after the import ban last year.
o The country’s economy was already in a spiral of debt and the scheme added to the crisis as Food inflation in Sri Lanka hit a record 21.5 percent in January 2022.
Sky-rocketing Inflation
As per the data released by the Sri Lanka government, the country recorded 15.1% inflation in February 2022 and now has reached 25.7%.
The budget deficit was also expected at 10.7% of GDP in 2022 after an 8.9% of GDP deficit in 2021.
Spiralling debt
- Although the COVID-19 pandemic precipitated a crisis of trade imbalance, the fundamentals of the Sri Lankan economy have always had serious issues Debt, both domestic and foreign, had been a major problem.
- Reports say that Sri Lanka has borrowed repeatedly since 2007 leading to $11.8 billion worth of piled up debt through ISBs which makes up 36.4% of its external debt.
Other factors
- The Russian invasion of Ukraine and the sudden resurgence of Covid-19 cases in China have further exacerbated the foreign exchange problem of Sri Lanka since they have resulted in the disruption of supply chains and a rise in the cost of goods globally.
Impact on ground level
- A sudden rise in prices and shortage of key commodities: Sri Lanka depends heavily on imports to meet its various needs such as petroleum, food, paper, sugar, lentils, medicines, and transportation equipment, among other essential items.
-A lack of foreign currency means the country does not have the money to buy (import) these commodities.
-Forced tens of thousands of people to queue for hours outside petrol filling stations.
- The government also announced nationwide 7.5-hour daily power cuts. It was considered to be the longest power cut announced in Sri Lanka in 26 years.
- The severity of the crisis is such that the country had to cancel school exams due to the shortage of paper.
- Sri Lanka’s major newspapers suspended their publication as the newsprint scarcities and price escalations hit the media organisation.
- The situation is so critical that the government had to suspend operations at its only fuel refinery because it ran out of crude oil stocks.
- Angry crowds are blockading streets. The government is using police and the army to monitor the situation and prevent any unrest.
Government Actions:
As part of its measures to tackle the crisis, the Sri Lankan government has sought India and china’s assistance
- Acting in the Neighbourhood’s first policy, India recently announced to extend a $1 billion line of credit to Sri Lanka as part of its financial assistance to help the country deal with the economic crisis.
- New Delhi had extended a $500 million line of credit to Colombo in February to help it purchase petroleum products.
- India had also signed off on a $400-million credit swap facility with Sri Lanka.
- China is reportedly considering a $2.5 billion loan request from Sri Lanka.
- China is Sri Lanka’s fourth-biggest lender, behind international financial markets, the Asian Development Bank (ADB) and Japan.
Sri Lanka is a key part of China’s Belt and Road Initiative (BRI), a long-term plan to fund and build infrastructure linking China to the rest of the world, but which others including the United States have labelled a “debt trap” for smaller nations. - After months of resistance, the government is preparing to approach the International Monetary Fund (IMF) for an economic bailout.
Way forward:
- There is a need for ambitious fiscal consolidation based on high-quality revenue measures, raising income tax and VAT rates and minimising exemptions, complemented with revenue administration reform.
- Prime minister should also the scheduled meeting with the Tamil political leadership to create a road map on the issue of political devolution and economic development of the war-affected northern and eastern provinces, among the areas badly hit by the current crisis.
- Compulsions of electoral politics should not come in the way of tough measures such as restructuring the administration of concessions and subsidies.
- Overall, the nation requires immediate economic reforms to have stable economic health in the long run.
Economic crisis and India- Sri Lanka relation:
- The crisis has proved to be an opportunity for near-strained Indo-Lanka relations since China was occupying more space in Sri Lanka’s foreign policy priorities.
- China was not the only country from which Sri Lanka sought support. India has also acted as a saviour and time-tested friend for Sri Lanka.
- The crisis has resulted in the strengthening of economic relations between the two countries.
- Over the last two years, Sri Lanka has sought India’s support numerous times.
- India too has leveraged this opportunity to expand its economic presence in Sri Lanka in light of an increasing Chinese economic presence in India’s close neighbour.
- The credit facilities extended by India to Sri Lanka would certainly result in India becoming the top source of imports for Sri Lanka
- The crisis has also allowed India to further its geopolitical interests by increasing its presence in strategically important places in Sri Lanka.
- Both India and Sri Lanka, should ensure that the present crisis is not used to step up smuggling and trafficking activities.
- On the contrary, the crisis should be used as an opportunity for New Delhi and Colombo to thrash out a solution to the Palk Bay fisheries dispute, a longstanding irritant in bilateral ties.
New refugees from Sri Lanka in Tamil Nadu
Indian intelligence agencies believe that as unemployment and skyrocketing inflation drive more and more people to desperation in coming days, the numbers of refugees are likely to only increase.
Can India handle it?
- India does not have a refugee law in place as it is not a signatory to the 1951 UN Convention Relating to the Status of Refugees and the related protocol
- However, from 1983 onwards and until 2021, India has provided refuge to over three lakh Sri Lankan Tamil nationals, who fled ethnic persecution in their war-torn homeland and landed in India.
- They were put up in the Mandapam camp and allowed to work as daily wagers. They were also allowed to access education for themselves and their families. The state government even set up a State Bank of India counter for the migrants to exchange their currency to the Indian rupee.
- This happened because the Indian government agreed to shelter Sri Lankan Tamil refugees on humanitarian grounds,
- Immigration comes under the Union list.
- Many factors including security concerns, bilateral relations between India and Sri Lanka, ethnic history with regard to Sri Lankan Tamil migration to India, and the proof of identity of refugees etc. will be considered by the Union government before refugee status can be granted to the new migrants
