The nation of Sri Lanka is in the midst of one of the worst economic crises it has ever seen. It has just defaulted on its foreign debts for the first time since its independence and the country’s 22 million people are facing crippling 12-hour power cuts, and an extreme scarcity of food, fuel, and many other essential items such as medicines. Inflation is also at a high time high of 17.5%. The prices of food items such as rice, milk powder etc. are soaring high at an unimaginable rate. There is also a shortage of these food items.
President Gotabaya Rajpaksha has declared a state of emergency. But, in less than a week, he withdrew it following the massive protests by angry citizens over the government’s way of handling the crises. The country relies on the import of many essential items such as petrol, food and medicines.
Who is responsible for the crises?
Many people are blaming China for the current economic crises in Sri Lanka. It is believed that Sri Lanka’s economic relations with China is the main reason behind the crises. The United States has named this phenomenon as debt-trap diplomacy. It means that ‘when a creditor country or institution extends debt to the borrowing nation to increase the lender’s political leverage if the borrower extends itself and cannot pay the money back, then they are at the creditor’s mercy.’ however, loans from China accounted only for 10% of Sri Lanka’s total foreign debt in 2020. The largest portion of 30% can be attributed to the international sovereign bonds.
Reasons for the crises
The financing of the Hambantota port and China’s infrastructure-related loans are being cited as the factors contributing to the crises. But according to the facts, that is not the case.
Post-independence from the British in 1948, Sri Lanka’s agriculture was dominated by export-oriented crops such as tea, coffee, rubber and spices. A large share of its gross domestic product came from foreign exchange earned from exporting these crops. This money was then used to import essential food items. Over the years, Sri Lanka has also begun exporting garments and earning foreign exchange from tourism and remittances. Any decline in these exports would come as an economic shock and put foreign exchange reserves under a strain. Solely for this reason, Sri Lanka frequently encountered balance of payment crises.
From 1965 onwards, Sri Lanka obtained 16 loans from the international Monetary Fund (IMF). Each of these loans came with a condition including one that, ‘once Sri Lanka received the loan, they had to reduce their budget deficit, maintain a tight monetary policy, cut government subsidies for food and depreciate the currency so that the exports would become more viable. These conditions are very harmful for a country’s economy. Naturally, Sri Lanka suffered from an economic crisis.
The last IMF loan to Sri Lanka was in 2016 in which, the country received US$1.5 billion for three years from 2016-2019. The conditions for receiving the loan were the same and thus, the economy’s health nosedived over this period.
The result
Under these conditions, naturally the country’s growth, investments, savings as well as revenues fell while the burden of the debt rose. The already bad situation took a turn for the worst with two economic shocks in 2019.
- There was a series of bomb blasts in churches and luxury hotels of Colombo in April 2019. It led to a steep decline in tourist arrivals, with some reports stating up to an 80% drop of Foreign Exchange Reserves.
- The new government under the President Gotabaya Rajapaksha irrationally cut the taxes.
When the COVID-19 pandemic struck
In April 2021, the Rajapaksha government made another fatal mistake by completely banning all fertilizer imports to prevent the drain of the foreign exchange reserves. Although it was withdrawn in November 2021, it still led to a drastic fall in the agricultural production. Due to the restraint in Foreign Exchange Reserves, Sri Lanka couldn’t import goods and the income from the exports was also at an all-time low which has led to the current situation of crises.
Edited By: Khushi Thakur
Published By: Mohammed Anees
