Sri Lankan economic crisis (2019–Present)

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Economic Crisis in Sri Lanka
Date2020 — ongoing
(1 year, 3 months and 3 weeks)
Location
Sri Lanka
Caused by
  • Continued increase in oil and gas prices
  • Global Supply Chain Crisis
  • High Inflation
  • Passage of anti chemical fertilizer act by the parliament (reversed as of present but chemical fertilizer is no longer subsidized[1])
StatusOngoing

Since 2010 Sri Lanka witnessed a sharp rise in foreign debt, reaching 42.9% of the country's GDP by year 2019.[2] 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[]

Sri Lanka is facing such an embarrassing economic crisis due to the shortsightedness of the politicians, temporary solutions and short term planning without a visionary leadership in addtion to the personal agenda of politicians who were more interested in maximising their self interest by filling their pockets out of the loan obtained to carry out infrastructure projects.[3]

In 2021, the Sri Lankan Government officially declared the worst economic crisis in the country in 73 years.[4]

Local news papers have depicted cartoons of Sri Lanka pleading for cash from neighboring SAARC countries.[5] Sri Lanka's Energy Minister Udaya Gammanpila acknowledged the crisis could lead to a financial terror.[6]

Despite commentaries blaming China for the debt crisis, the Australian Lowy 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.[7]

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.[8] 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."[9] To resolve the debt crisis, BELLWETHER noted that Sri Lanka would need 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.[10]

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.[11] According to the World Bank, "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 are 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 besides proper taxation, a more export-oriented growth wiykd be necessary to uplift the Sri Lankan economy from the current debt crisis, and it was hoped that Sri Lanka would make a full financial recovery.[12]

In January 2022, President Gotabhaya Rajapaksa's office stated that it would appeal to China to reschedule its debt burden in talks with Chinese foreign minister Wang Yi.[13]

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,[14] but ignored critical voices from scientific and farming community who warned about possible collapse of farming,[15][16][17][18][19] including financial crisis due to devaluation of national currency pivoted around tea industry.[15]

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.[20] 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.[21]

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.[22][23][24] The government cancelled some of these measures, but importing urea remains banned.[25] Sri Lanka is seeking to introduce peacetime rationing of essential goods.[23]

In November 2021, Sri Lanka abandoned its plan to become the world's first organic farming nation following rising food prices and weeks of protests against the plan.[26]

Development[]

In January 2022, India extended a $400 million swap and also deferred an Asian Clearing Union settlement of $500 million.[27] Moreover, India granted a new line of credit worth $500 million for the purchase of petroleum products.[28] Despite the growing concerns over the inflationary pressure, Govenor of Central Bank of Sri Lanka Ajith Nivard Cabraal insisted in January 2022 that Sri Lanka does not need an IMF relief as he was optimistic that Sri Lanka can settle its mandatory outstanding debt including the international sovereign debts.[29] As of February 2022, foreign reserves of Sri Lanka had hit rock bottom falling to $2.36 billion. Sri Lanka has foreign debt oblgations of $7 billion including a $1 billion worth of soverign bonds which is to be repaid in July 2022.[30]

A delegation from International Monetary Fund made a visit to Sri Lanka from 7 December to 20 December 2021 in order to assess and review Sri Lanka's economic policies.[31] The International Monetary Fund's executive board had discussed Sri Lanka's economy after the end of the annual discussions which took place on 25 February 2022.[32] As of 25 February 2022, IMF had declared that the public debt of Sri Lanka is very much unsustainable and warned the Sri Lankan government to refrain from printing money to prevent monetary instability but lauded the vaccination drive which had cushioned the impact of the pandemic.[33] IMF had assessed the prevailing economic calamity of Sri Lanka by compiling an Article IV Consultation Assessment.[34][35] In addition, IMF predicted that the economy of Sri Lanka is expected to grow by 2.6 percent by 2022.

As of 7 March 2022, Ajith Nivard Cabraal revealed that the regulator of the banking system is effectively devaluing its national currency with immediate effect and the offcial rupee rate fell to a record historic low of Rs. 229.99 against the US Dollar.[36][37] The devaluation decision is also seen as a massive step-up in the country's attempt to seek IMF assistance and bailout.[38][39] Former CBSL deput governor W A Wijewardana slammed the current monetary policy decisions taken by CBSL especially for its decision to fix the rupee to Rs. 230 by indicating that FOREX crisis cannot be solved unless the implementation of floating exchange rate.[40] Opposition legislator Harsha de Silva opined his views saying the devaluation of LKR to Rs. 230 is still insufficient and not good enough to avert Sri Lanka's foreign reserve crisis.[41] Soon after the rupee devaluation, Sri Lankan stocks had jumped to 4 month low after All share Price Index lost 4 percent on 8 March 2022.[42]

Finance Minister Basil Rajapaksa had urged all the government authorities to switch off all the street lights at least up until the end of March 2022 in an attempt to preserve and conserve the electricity.[43] However, it is set to have a significantly negative impact on female labour force participate ratio especially it has taken a toll on the safety of working women who work in night shifts in supermarkets and in other workplaces.[44] Sri Lanka is also experiencing one of the worst economic crisis in decades and the dwindling foreign reserves is also felt on the electricity consumption, fuel consumption and cooking gas resulting in severe shortages. Nearly, 1000 bakeries have been shut as a response to shortages of cooking gas triggered by chaotic foreign reserve crisis.[45] Long queues have formed in recent months in front of petrol filling stations due to fuel shortage owing to foreign reserve crisis.[46] The surge in global oil prices further aggravated the fuel shortage in Sri Lanka as the country had to pay more than before to get the supply of fuel with the risk of more outflow of foreign reserves was on the cards.[47][48]

The Gotabaya government came under scrutiny with its unnecesary interest regarding investing on white elephant projects such as highways, expressways, tourist destinations at a time when ordinary Sri Lankan citizens are unable to fulfill their basic needs due to shortages of essential items such as milk powder, chicken, gas, other food items, fuel and electricity.[49][50] In order to conserve the energy, daily power cuts have been imposed by the authorities throughout the country which would last five hours to seven and half hours per day.[51][52]

The repercussions of the ongoing tense situation between Ukraine and Russia due to Russo-Ukrainian War is felt in the already sluggish economic conditions of Sri Lanka.[53] The 2022 Russian invasion of Ukraine has further exacerbated the economic calamity of the country as Russia is the second biggest market to Sri Lanka in tea exports and Sri Lanka's tourism sector is heavily reliant upon these two nations as most of the tourist arrivals are from Russia and Ukraine.[54] As a result, the Ukrainian crisis has put a halt to the path of economic recovery of Sri Lanka with both tea and tourism sector have been hit hard.[55]

References[]

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