Since 2019, Sri Lanka has been suffering through the most severe economic crisis of its history, which has now led the country’s economy to total collapse. Here is a glimpse of some of the major news erupting from the nation:
The once packed with tourists, famous for its majestic natural beauty, and named the paradise island, is now standing on the verge of bankruptcy. Over 500,000 Sri Lankan residents have fallen into poverty in the last few months.
The scarcity of basic necessities, including fuel and medicine, further worsens the situation. As a result, doctors claim that the current crisis could kill more Lankens than COVID.
Daily power blackouts and widescale protests are shaping the country. But, what is happening in Sri Lank is much more than an economic crisis, but a humanitarian crisis.
But what has led to the downfall of Sri Lank? What is behind Colombo’s Bankruptcy?
What is Behind Sri Lanka’s Bankruptcy?
Numerous factors can be held accountable for the current crisis in Sri Lanka, including:
Trade Deficit
The current crisis is the result of a year of simmering mismanagement. For a long time, the Island nations have been importing more than it exports, and buying more than it earns, thus leading the country to budget and trade deficit.
The Asian Development Bank flagged this issue in 2019:
“The country’s national expenditure exceeds its income, and its tradable goods and services are inadequate.”
Asian Development Bank
Experts also point to a lack of discipline in the importation process. Non-essential commodities such as cheese, butter, vegetables, candies, fruits, ice creams, and sauces costed Sri Lanka $6 billion in 2021. In addition, imports of mobile phones cost $386 million.
“The country’s major problem is the dollar dilemma. Our dollar receipts are not enough even to repay our debts.”
Mahinda Amaraweera
With a $6 billion trade imbalance and massive debt accrued via foreign loans, sovereign bonds, and largescale infrastructure projects, repayment is difficult. “For years, we’ve been living beyond our means,” Ahilan Kadirgamar, a political economist at Jaffna, said.
Also Read: Explained: Why is Sri Lanka on the Verge of Bankruptcy?
But, despite that, instead of focusing on increasing its earnings, Sri Lanka expanded its debts. The government borrowed heavily from agencies and countries to fill in the gaps. Today, the debt to GDP ratio of Colombo is 111%. Therefore, the country owes more than it produces.
Fertilizer Ban
The fertilizer prohibition, too, proved to be a disaster. So when Gotabaya proclaimed his intention to convert the country’s agriculture industry to 100% organic, he hoped to save money on imports while simultaneously protecting the environment.
Agricultural specialists and economics had predicted food scarcity. Saman Dharmakeerthi, a professor of soil fertility and plant nutrition at Kandy’s University of Peradeniya, says, “The restriction resulted in a 25% loss in production,“
The agriculture business had lost nearly half of its production capacity when the government realized its error and reversed the prohibition. As a result, the country had to lean on other nations even more for rice and other necessities.
Last year, Sri Lanka and Myanmar agreed to purchase 50,000 tonnes of parboiled rice and one lakh tonnes of white rice. In addition, it imports grains from India. In January, China supplied one million tonnes of rice.
The Bleeding Tourism Industry of Sri Lanka
Sri Lanka’s GDP is heavily reliant on its travel and tourism industry. But, dues to various factors, by 2019, the tourism sector was already suffering.
The eastern bombings scared the tourists who would spend vacations in the island nation. Then followed the coronavirus. When borders closed, tourism completely shut down, and so did the tourism revenue. 13% of the GDP was completely gone for months.
Furthermore, tourists are also a source of foreign currency. For example, in 2020, only 173,000 tourists visited the country compared to 2.3 million in 2018.
China’s Role in Deepening the Crisis
Sri Lanka’s massive foreign debt burden, particularly to China, is one of the country’s most critical challenges. The Island country owes China about $5 billion in debt and received a $1 billion mortgage from Beijing last year to cope with its severe financial difficulties, that’s being paid back in instalments.
Sri Lanka will be needed to repay an estimated $7.3 billion in domestic and foreign debts over the next 12 months, including a $500 million international sovereign debt repayment in January. But, according to The Guardian, accessible foreign currency reserves were only $1.6 billion in November.
The Sinking Economy
By 2021, tax, tourism, and remittances revenues have fallen. Agriculture production, which accounts for 80% of the GDP, was also on a steep downfall. And top of it all was the raging pandemic leading to the fall in money lending by foreign agencies.
All these elements together formed the perfect recipe for disaster. But, what has been more disastrous is the reciprocatory responses to the crisis.
Protestors Demanding President’s Resignation
Along with the skyrocketing inflation, protestors are camping out around the president s office. Blaming the president for the economic catastrophe, the protestors are demanding the president resign.
To demonstrate their anger against the president, Muslim protestors broke their Ramadan fasting at the location to share meals with others around them, and supporters of the demonstrators provided drinking water and food.
Many of the rallies this week have targeted the Rajapaksa family, which has dominated Sri Lanka for much of the last two decades. Critics accuse the family of using excessive borrowing to fund projects that have failed to generate revenue, such as a port facility financed with Chinese financing.
More Pain in Store for Sri Lanka
Now, the country is crumbling to save dollars, but one could also say that Sri Lanka walked into the storm. From a pro-market approach, the country shifted to a welfare-driven mode.
Inflation has risen by 30.20%, and prices of food have skyrocketed. With just $1.94 billion, Sri Lanka needs to feed, clothe, and provide security to 22 million people.
In a nutshell, Sri Lanka needs $20 billion for essential imports like food and fuel and to restart exports, but where will this money come from?
