2021 Sri Lankan economic crisis

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Since 2014 Sri Lanka witnessed a sharp rise in foreign debt, reaching 42.9% of the country's GDP by year 2019.^[1] The onset of the COVID-19 pandemic induced global recession accelerated the crisis and by 2021 the foreign debt rose to 101% of the nation's GDP causing an economic collapse.

Background[]

In 2021, the Sri Lankan Government officially declared the worst economic crisis in the country in 73 years.^[2]

Local news papers have depicted cartoons of Sri Lanka pleading for cash from neighboring SAARC countries.^[3] Sri Lanka's Energy Minister Udaya Gammanpila acknowledged the crisis could lead to a financial terror.^[4]

Despite commentaries blaming China for the debt crisis, Lowly Institute pointed out that Sri Lanka was "not engulfed in a Chinese debt trap" as external debt owed to China was only about 10% of the debt stock in April 2021. Instead the majority of Sri Lanka’s external debt stock is owed to international capital markets who held 47%. Another 22% is held by multilateral development banks, then followed by Japan having 10% of Sri Lankan external debt.^{[5][verification needed]}

In 2020 a New York-based agency said Sri Lanka's existing funding sources did not appear sufficient to cover its debt servicing needs estimated at just over $4.0 billion in 2021.^[6] According to economist BELLWETHER "To solve Sri Lanka’s ‘budgetary problem’ in repaying debt, Treasuries auctions have to succeed. When that is done, the ‘transfer problem’ of foreign exchange will be automatically solved. But this is beyond the ken of Keynesians. Instead with failed Treasury bill auctions filled with printed money under Modern Monetary Theory the country is slipping deeper into imbalances."^[7] To resolve the debt crisis BELLWETHER noted that Sri Lanka needs a credible fiscal plan and monetary policy, taxes have to be hiked in order to repay debt, and interest rates and opening of imports will allow taxes to flow back to the Treasury. While it is possible to raise rates and generate dollars to repay foreign debt by curtailing domestic credit, it is not practical to do it on an ongoing basis for many years. If investors see foreign reserves going up after debt repayments confidence may could come back. But it is a painful affair, which may or may not work given the current ideology.^[8]

The damage to the once-prosperous tourism industry induced by the Covid-19 pandemic has also been blamed for failing to generate enough national revenue to pay off the debts.^[9] According to World Bank Sri Lanka Development Update: Economic and Poverty Impact of COVID-19 "Despite the heavy toll of the COVID-19 pandemic on Sri Lanka’s economy and the lives of its people, the economy will recover in 2021, though challenges remain." Positive signs of recovery is already being observed, proper taxation to build up self-dependence and to avoid high dependence on foreign debts in future has been highly encouraged. The current social protection initiatives to help those that have lost their jobs during the debt crisis have been deemed effective. Economists suggested that beside proper taxation, a more export-oriented growth is said to be necessary to uplift the Sri Lankan economy from the current debt crisis, and it is hoped that Sri Lanka will make a full financial recovery soon.^[10]

Agricultural crisis[]

In 2021 Sri Lanka started the first "100% organic farming" program and imposed a countrywide ban on inorganic fertilizers and pesticides in June 2021. The program was welcomed by its advisor Vandana Shiva,^[11] but ignored critical voices from scientific and farming community who warned about possible collapse of farming,^{[12][13][14][15][16]} including financial crisis due to devaluation of national currency pivoted around tea industry.^[12]

By September 2021, Sri Lanka experienced massive drop in farming output by up to 50% and food shortages. The situation in tea industry was described as critical, with farming under the organic program being described as ten times more expensive and producing half of the yield by the farmers.^[17] In September 2021 the government announced "economic emergency", as the situation was further aggravated by falling national currency exchange rate, inflation rising as result of high food prices, and pandemic restrictions in tourism which further decreased country's income.^[18]

The trade in chemical fertilizers and pesticides has been banned. This fact produced a severe economic crisis, since the population expects to remain without income and without food.^[19][20][21] The government cancelled some of these measures, but importing urea remains banned.^[22] Sri Lanka is seeking to introduce peacetime rationing of essential goods.^[20]

References[]