Sri Lankan economic crisis (2019–present)

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Since 2010, Sri Lanka witnessed a sharp rise in foreign debt, reaching 88% of the country's GDP in 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 crisis. Several protests were staged by the political opposition demanding the current Gotabaya administration to solve the financial crisis and to immediately resign in wake of the economic crisis.^[3]

The current Government of Sri Lanka, led by president Gotabaya Rajapaksa, made continuous cascading policy errors which resulted in a huge economic crisis for Sri Lanka. The government, which came to power following a landslide victory in the 2019 presidential election subsequent 2020 parliamentary elections, committed multiple blunders in it's economic policy, which included imposing huge tax cuts which took a toll on government revenue and fiscal policies. The incumbent government announced the tax cuts as part of its populist agenda to win the elections. Due to the slashing of taxes, budget deficits soared from 5% in 2020 to 15% in 2022. The implementation of bad monetary policies has resulted in a catastrophic situation for Sri Lanka, triggering social unrest and protests as ordinary citizens in Sri Lanka are unable to bear the soaring cost of living. Sri Lanka is on the brink of bankruptcy, as the remaining foreign reserves of US$2.3 billion as of March 2022 would not be sufficient to pay the country's foreign debt obligations for 2022, with US $7 billion to be paid, including an ISB payment of US$1 billion, which is pending in July 2022. The national inflation rate increased to 17.5% in February 2022, according to the National Consumer Price Index.^[4]

Background[]

Sri Lanka is facing such a disastrous economic crisis due to the shortsightedness of its politicians who emphasized on temporary solutions and short-term planning instead of a long-term approach, in addition to the agenda of politicians who were more interested in self-enrichment by using loans obtained to carry out infrastructure projects.^[5]

In 2021, the Sri Lankan Government officially declared the worst economic crisis in the country in 73 years.^[6]

Local news papers have depicted cartoons of Sri Lanka pleading for cash from neighboring SAARC countries.^[7] Sri Lanka's Energy Minister Udaya Gammanpila acknowledged the crisis could lead to a financial disaster.^[8]

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 which accounted for 47%. Another 22% is held by multilateral development banks, followed by Japan having 10% of Sri Lankan external debt.^[9]

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.^[10] According to the agency 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 debt."^[11] 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 come back but it is a painful affair, which may or may not work given the current ideology.^[12]

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.^[13] 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 would 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.^[14]

In January 2022, President Gotabhaya Rajapaksa's office stated that it would appeal to China to reschedule its debt burden during talks with the Chinese foreign minister Wang Yi.^[15]

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,^[16] but it ignored criticism from scientific and farming community who warned about the possible collapse of farming,^{[17][18][19][20][21]} including a financial crisis due to devaluation of national currency, which pivoted around the tea industry.^[17]

By September 2021, Sri Lanka experienced a 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.^[22] In September 2021, the government announced an economic emergency, as the situation was further aggravated by the falling national currency exchange rate, inflation rising as result of high food prices, and pandemic restrictions in tourism which further decreased the country's income.^[23]

The banning of the trade of chemical fertilizers and pesticides produced a severe economic crisis, since the population expects to remain without income and without food.^[24][25][26] The government cancelled some of these measures, but importing urea remains banned.^[27] Sri Lanka is seeking to introduce peacetime rationing of essential goods.^[25]

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.^[28]

Development[]

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 IMF relief, as he was optimistic that Sri Lanka can settle its mandatory outstanding debt, including its international sovereign debts.^[29] As of February 2022, the foreign reserves of Sri Lanka fell to $2.36 billion. Sri Lanka has foreign debt obligations of $7 billion, including $1 billion worth of sovereign bonds which is to be repaid by July 2022.^[30] The government is planning to hire a global law firm to provide technical support and assistance on debt restructuring.^[31]

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.^[32] 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.^[33] As of 25 February 2022, the IMF had declared that the public debt of Sri Lanka is 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.^[34] IMF had assessed the prevailing economic calamity of Sri Lanka by compiling an Article IV Consultation Assessment.^[35][36] 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 reported that the regulator of the banking system is effectively devaluing its national currency with immediate effect and the official rupee rate fell to a record historic low of Rs. 229.99 against the US Dollar.^[37][38] The devaluation decision is also seen as a massive step-up in the country's attempt to seek IMF assistance and bailout.^[39][40] The former deputy governor of the CBSL W.A. Wijewardana criticized the monetary policy decisions undertaken by CBSL, especially for its decision to fix the rupee to Rs. 230, indicating that FOREX crisis cannot be solved unless the floating exchange rate is implemented.^[41] Opposition MP Harsha de Silva opined that the devaluation of LKR to Rs. 230 is still insufficient and not enough to avert Sri Lanka's foreign reserve crisis.^[42] Soon after the rupee devaluation, Sri Lankan stocks fell to a 4 month low after the all share price Index lost 4 percent on 8 March 2022.^[43]

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 conserve electricity.^[44] However, it is said to have a significantly negative impact on the female labour force participation rate as it has taken a toll^{[failed verification]} on the safety of working women who work in night shifts in supermarkets and in other workplaces.^[45] 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.^[46] Long queues have formed in recent months in front of petrol filling stations due to fuel shortage owing to foreign reserve crisis.^[47] 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.^[48][49]

The Gotabaya government came under scrutiny with its unnecessary interest regarding investing on white elephant projects^{[neutrality is disputed]} 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.^[50][51] 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. This decision is unanimously imposing a great encumbrance on Education of students who had an online-leaden education as the Power cut during day-time and also night-time had caused the students to dither across examinations. ^{[52][53][failed verification]}

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.^[54] 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.^[55] 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.^[56]

In March 2022, several schools in Sri Lanka announced that the term/mid year examinations would be postponed indefinitely due to paper shortages throughout the country mainly triggered by lack of foreign reserves to import papers.^[57][58] The term test examinations were slated to be held island-wide on 28 March 2022 but due to the acute shortage of printing paper and ink ribbon, a decision was made to either fully cancel or postpone the exam to a later date until the normalcy is returned.^[59]

On 22 March 2022, the government ordered the military to post soldiers at various gas and fuel filling stations to curb the tensions among people who line up in queues and to ease the fuel distribution.^[60][61] There are various reports claiming at least three people have died while standing in long queues for hours due to excessive heat.^[62] One motorcyclist was stabbed to death by a three wheel driver in a fuel filling station over a dispute.^[63]

Impact on tourism[]

In March 2022, United Kingdom and Canada warned their travellers to be aware of the current economic situation in Sri Lanka.^[64]

Foreign aid[]

In January 2022, India extended a $400 million swap and also deferred an Asian Clearing Union settlement of $500 million.^[65] Moreover, India granted a new line of credit worth $500 million for the purchase of petroleum products.^[66]

On 17 March 2022, Sri Lanka received further US$1 billion credit line as life line from India in order to buy urgently needed essential items such as foods and medicines.^[67][68] The credit line was activated after India and Sri Lanka formally entered into a credit agreement during finance minister Basil Rajapakse's visit to New Delhi.^[69]

References[]