Sri Lanka's Economic Crisis

 

The nation of Sri Lanka has been in the news for all the wrong reasons since 2019. However, things really took a turn for the worse around the start of 2022. People have blamed this amazing economic crisis on multiple factors which seem to have coalesced into something truly devastating. Officials blame the COVID -19 pandemic while most citizens blame former President Gotabaya Rajapaksa's poor economic policies and fiscal mismanagement for the country's dismal state. Unfortunately, such a disaster can only occur through a consecutive series of consistently unfortunate incidents.

In 2009, when the civil war ended Sri Lanka decided to put a higher emphasis on domestic production and consumption of goods instead of attempting to improve foreign trade. Basically, it ensured that income through exports to other countries would be low but the cost of imports would keep increasing. As of July 2022, Sri Lanka imports $3 billion more than it exports annually, and thus, it has been drained of foreign currency reserves. When 2019 ended, the country has $7.6 billion in foreign currency reserves which have dwindled down to about $250 million. Additionally, Mr. Rajapaksa has also received criticism for his policy of big tax cuts which were introduced in 2019. This decision lost the government income of more than $1.4 billion annually.

The government was too late to act. When the nation's foreign currency reserves dropped down to alarming numbers around the start of 2021, the leaders made the foolish decision to ban imports of chemical fertilizer. This forced the farming community to use locally sourced organic fertilizers which led to widespread crop failure. Subsequently, the nation faced a food crisis that had to be solved through foreign help which worsened the foreign currency issue.

Hence, the company has run out of money. Now, the world (and the citizens of Sri Lanka too, unfortunately) have been witness to a rare phenomenon - we got to see what happens when a country does not have the resources to sustain itself. People have been struggling through daily power cuts and daily life is hampered by the fact that even essential services cannot be provided due to a lack of fuel.

 Once again, the nation needed to ask for foreign aid for this problem which only means that prices for petrol and diesel are soaring at the moment. In May, the situation became so dire that the country simply could not make an interest payment on it's foreign debt for the very first time in the nation's history. This is a truly damaging event because if a country cannot make interest payments then it is a warning to foreign investors. It only makes things worse by making it difficult for the country to procure international help. 

It has also hurt the country's economy and domestic currency. Schools were shut down and people were advised to work from home to conserve resources. As one might expect, the citizens decided to protest against the government which had led them down this weird and terrible path. The scale of national humiliation proved too much and the protests did not stop for a long time. Ultimately, Mr. Rajapaksa resigned as Prime Minister and fled the nation handing the reins over to Ranil Wickremesinghe. However, that has not diminished the anger of the citizens at all. In December 2022, Mr. Wickremesinghe was quoted saying that there is no point behind economic reforms at the moment because the country does not have a stable economy to function adequately. 

As of June 2022, the country owes over $51 billion to international investors which includes a $6.5 billion debt to China which has already started discussing plans to restructure the loans. The World Bank had agreed to lend $600 million to Sri Lanka while India had offered at least $1.9 billion. The International Monetary Fund (IMF) had discussed a possible loan of $3 billion. However, right now, all such talks of foreign aid are contingent on the fact that the country will soon have a stable government that will be able to increase interest rates and improve it's revenue generation through higher taxation to help fund such plans. Hence, a new administration is crucial for the country to turn around and start the long arduous climb back up to it's rightful place in the world.