Economic crisis is triggering political upheaval in India's neighbourhood. After Pakistan, Sri Lanka is heading towards a political crisis. Sri Lanka is reeling under a severe foreign exchange reserve crisis as the reserves saw a 70 per cent drop in two years. The Rajapaksa government is struggling to pay for essential imports, including fuel while the international rating agencies have downgraded the country’s credit ratings.

What led to the economic meltdown?

It’s not just the COVID-19 pandemic that compounded the island nation’s problems, it was the economic mismanagement by successive governments that created a twin deficit - a budget shortfall alongside a current account deficit. In other words, the country’s national expenditure exceeds it’s national income and that it’s production of tradeable goods and services is inadequate. In addition to this, ill-time tax cuts, weak government finances and skyrocketing inflation, impacting foreign remittances are some of the factors for the current economic meltdown in the country.

Drop in foreign currency reserves

Sri Lanka’s foreign currency reserves dropped 70 per cent since January 2020 to around $2.3 billion by February. It faces debt payments of $4billion for the remaining period of this year,one of which is $1 billion in the form of a sovereign bond that matures in July. It’s reserves are enough to only pay for about a month’s worth of imports.

Also Read: What's Happening in Sri Lanka and How Economic Crisis is Affecting People?

In 2019, President Gotabaya Rajapaksa announced tax cuts upto 15 per cent and also abolished other taxes to boost consumption and growth. Then, the COVID-19 pandemic impacted its tourism sector which is a revenue generation machine for the country. During this period, the foreign remittances dropped. Even before the COVID-19 outbreak, the Easter bombing in 2017 had hit the tourism industry badly. To add to the tourism sector woes, Russia and Ukraine conflict started. The tourists from these two war-hit countries amounted to 25 per cent of the inflow till mid-February.

India’s Helping Hand

Centre has hinted that it could consider the request for the new credit line. The Lankan government can use this credit for importing essential items such as rice, wheat flour, pulses, sugar and medicines. Earlier, ndia extended a $400-million currency swap and a $500-million credit line for fuel purchases to Sri Lanka. The Rajapaksa government has requested at least another $1billion from New Delhi.

After providing the Central Bank of Sri Lanka with a $1.5 billion swap and a $1.3 billion syndicated loan to the government, China is considering offering the island nation a $1.5 billion credit facility and a separate loan of up to $1 billion.