Sri Lanka economic crisis

Sri Lanka economic crisis

Sri Lanka economic crisis?

Sri Lanka economy is currently battling its worst economic crisis in history. A severe shortage of foreign currency has left the Sri Lankan government unable to pay for essential imports, including fuel, cooking gas, and power cuts that last up to 13 hours a day. Sri Lanka’s currency has also been devalued by almost SLR 90 against the US dollar, with inflation reaching 18.7 percent in March 2022. 

The large tax cuts by the Gotabaya Rajapaksa government result in budget deficits increasing from 5 percent in 2020 to 15 percent in 2022. Also, Sri Lanka has been caught in a vicious cycle of borrowing money from China for infrastructure projects and being unable to pay it back. Sri Lanka has even appealed to China for debt restructuring or the extension of a credit line, but China has not shown any favor. In March 2022, Sri Lanka received a US dollars 1 billion credit line to buy urgently needed essential items. However, given the escalating protests and the likelihood that the lender’s required austerity measures won’t be well received, the government may struggle to hold on for very long.

What’s happening to Sri Lanka’s economy?

The resignation of the president raises the prospect of a power vacuum in Sri Lanka.

To address the financial and economic crisis, a functioning government is required.

The country owes foreign lenders more than $51 billion (£39 billion), including $6.5 billion to China, which has begun conversations about refinancing its loans.

The G7 group of countries. Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States – have stated that it supports Sri Lanka’s efforts to decrease debt obligations.

The World Bank has agreed to lend $600 million to Sri Lanka, and India has promised at least $1.9 billion.

President left the economy

The country’s foreign reserves were over USD 8 billion when Gotabaya Rajapaksa took office as Sri Lanka’s seventh executive president in November 2019. 1 By the end of the next year, the figure had dropped to less than 4 billion. It would be less than 2 billion by December 2021. The island nation entered 2022 with very limited foreign reserves to cover its ever-increasing import bill, particularly for gasoline, gas, and power, after a series of lockdowns that had immobilized the economy.

Sri Lanka’s economy has now collapsed. Fuel supplies began to dwindle in mid-January. 5 blackouts lasting 90 minutes per day increased to more than 10 hours. 6 Once considered necessities, medicines, and drugs are today considered luxuries. 7 Food supplies have been jeopardized, owing largely to the fuel crisis: vehicles delivering vegetables, fruit, and fish have been unable to function due to a lack of diesel. 8 The situation is so grave that specialists predict acute malnutrition will grow from 13% to 20%, while the number of severely malnourished children would more than quadruple from 35,000 to 70,000.

The problems in Sri Lanka predate the current crisis. Naturally, much of the commentary has concentrated on the last two years, blaming the Rajapaksas for the country’s economic disaster. Very few assessments have looked into the structural origins of that collapse, but those that have fallen into one of two categories, which this article refers to as the “orthodox” and the “heterodox.” Both emphasize the structural nature of the issue, but from opposing perspectives: the orthodox camp emphasizes the government’s failure to liberalize the economy, while the heterodox side emphasizes the country’s failure to industrialize.

Economists typically characterize Sri Lanka as export-dependent. The more accurate description would be that it is significantly reliant on imports. The country’s economic crisis has extremely few dynamic export sectors, according to Harvard University’s Atlas of Economic Complexity. 41 Its principal exports include textiles and commodities such as tea, which face strong competition from expanding African and Asian markets. These export sectors rely on imported intermediate goods and raw materials from industrialized countries. Global price and supply-side shocks have severely damaged these sectors: for example, the country’s textile industries, which were previously considered dynamic and promising, have come to a halt due to power outages.