What Led to Sri Lanka's Economic Crisis, Check Reasons Here

10 May, 2022 16:46 IST|Priyadarshini

The island nation of Sri Lanka is facing a huge crisis as fuel and food are scarce in the country. Hospitals, railways, colleges, and schools are paralysed due to continuous anti-government protests and subsequent curfews. The  Lankans demand an efficient system and new government in place as they believe Rajapaksas are no longer capable of governing the country.

Demonstrations and protests have become a daily affair across Sri Lanka.

What is happening today in the island nation is a result of sheer mismanagement by the successive governments over the years. The nation which is dependent on foreign goods, spends more on the imports There is a trade and budget deficit in the country. Instead of solving the problem, the country expanded its debt. The governments borrowed huge debts from other nations and international organisations.

In 2019, The Asian Development Bank said that "Country's national expenditure exceeds its national income and its production of tradable goods and services is inadequate."

In the same year, during the election campaigning the Sri Lankan presidential challenger Gotabaya Rajapaksa proposed sweeping tax cuts which meant less tax and lesser revenue in the public exchequer. After Gotabaya was elected to office, a series of tax cuts were implemented. Months later coffers of the island nation ran out of money. As a result, investors fled the nation and it became difficult for the Sri Lankan government  to handle the situation. In addition to this, Gotabaya in April 2021, banned chemical fertilisers and asked the farmers to do organic farming as he believed the chemical fertilisers were harmful for the health but critics said the calculated move was aimed at  saving foreign reserves. Subsequently, the production of rice fell by 50%. Sri Lanka has also banned the import of luxury items. 

In the month of February, SriLanka's foreign currency reserves were at $2.3 Billion. Compared to January 2020, the foreign currency reserves of Sri Lanka had fallen below 70%. If the foreign currency reserve of the country becomes low then that country will face problems importing goods.

By 2019, the tourism sector of Sri Lanka started seeing the impact of Covid-19 pandemic as the country borders were closed to contain spread of the Wuhan virus. These curbs affected the industry as the tourists stopped visiting the nation and as a result there was a drop in revenue. It is known that Sri Lanka depends on tourism for its 13% of GDP. In 2019, the tourism revenue was $7.5 Billion and in 2021, it fell down to $2.8 Billion. The Covid-19 also hit remittances from foreign countries. By late 2021, the revenue from tax had also fallen.

 The pandemic also added to it. The foreign agencies were not in the mood to lend money forcing the then the Lankan government to seek help from Bangladesh and it gave the cash-strapped  island nation a loan worth of $200 Million. India also extended its financial assistance of about $2.5 Billion. 

Ever since the coronavirus pandemic hit the nation, there was a continuous decline in the Sri Lankan rupee and it dropped on a faster note after March 7, when the Central Bank of Sri Lanka devalued it from Sri Lankan Rupee LKR 200 to 230 against the American dollar. The move was also deemed necessary to obtain support from the International Monetary Fund. 

Now one dollar is equal to 326 Sri Lankan rupees. The currency declined to 32% this year and the inflation is 30.2%. The prices of daily commodities also increased. According to the reports, Sri Lanka is having $1.94 Billion money as of March. Is it possible for Sri Lanka to feed the 22 Million population with that money and repay the loan? The nation was supposed to pay $78.2 Million as an interest payment. Sri Lanka is near bankruptcy.

A few days ago, Sri Lanka President Gotabaya Rajapaksa also declared a state of emergency for the second time in just a month of time. Sri Lankan Prime Minister Mahinda Rajapaksa stepped down from his post on May 9th. He said that he will be ready to make any sacrifice even in the future in order to help the people and the government overcome the present crisis.

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