Sri Lanka Economic Crisis

What Caused The Sri Lanka Economic Crisis?

Since 2010, the government of Sri Lanka has witnessed a steep increase in foreign debt, reaching more than 85% of the country’s GDP. Additionally, the COVID-19 added fuel to the fire thereby worsening the existing sri lanka economic crisis. Towards the end of 2021, the foreign debt increased by more than 100% of the nation’s GDP resulting in economic collapse. Few days ago, the Sri Lankan government declared an economic emergency due to boosting food cost, a declining currency, and sharply increasing forex reserves. The President of the country, Gotabaya Rajapaksa asked the army to handle the situation by making essential supplies accessible to the citizens of the country.

Sri Lanka is witnessing a tragic economic crisis mainly due to the lack of forethought of the politicians, non-appropriate resolutions and short term planning without well-structured management along with the individual motives of politicians who are least interested in benefiting the nation rather are more concerned about boosting their revenues.

Go through the write up which gives you a brief about Sri Lanka economic crisis explained in detail.

Why is Sri Lanka’s economy in trouble?

Several influences caused the current financial disaster in the country out of which many are explained below:

As per the Sri Lanka economic crisis explained, the tourism sector, which holds almost 10-12% of the entire nation’s GDP and brings in foreign exchange, was greatly impacted due to the coronavirus. Due to this pandemic, the overall forex reserves have lowered manifolds dropping from above $7.5 billion in 2019 to $2.8-3 billion in July, which become a reason for why Sri Lankan rupee is depreciating. Due to the dipping of the supply of foreign exchange, the amount of money that Sri Lankans had to shell out to purchase the foreign exchange necessary to import goods has risen. So due to all these factors, the net worth of the Sri Lankan rupee has decreased by more than 10%. The country at present is dependent majorly on imports to cater to the regular food supplies. So it caused maximum prices of food items and was a reason for depreciation of the Sri Lankan rupee.

The limitation of US currency in Sri Lanka has resulted in higher cost of most essential food items like milk, pulses, vegetables, etc. which are a part of regular meals. While another report disclosed that the Sri Lankan government uses the foreign currency to pay back the loan and the central bank has been running down foreign exchange reserves to manage the Sri Lankan rupee. Due to all these reasons, there is hardly much foreign currency remaining to pay back the loan, which resulted in inflation to increase beyond imagination.

Also the nation’s government has limited the usage of chemical fertilizers that become another reason for increase in the crisis by dampening agricultural production. Earlier this year, Mr. Rajapaksa announced the plan to make Sri Lanka the first country globally with a 100% organic agriculture sector. Many tea experts believe that this step will reduce the overall manufacturing of tea and other crucial crops and will result in a major food crisis, which will worsen the existing situation.

Sri Lanka economic crisis latest news

Based on the reports by the Sri Lankan government, speculators were among the reasons for significant hike in the food prices and hoarding supply of essential items. Due to all these reasons, many are doubtful regarding whether the Sri Lanka economy will collapse in the future and will be declared a financial crisis under the Public Security Ordinance. The army has been given the task to grasp the food supplies from traders and supply it to the consumers at the most affordable rates. It has got the power to utilize forex reserves for the purchase of important food items only. On the other hand, the government has denied its refusal to end its aggressive push for complete organic farming saying that going completely organic will give long-term advantages. Additionally, the government gives assurance to offer organic fertilisers to the farmers as another option.

China is considering $2.5 billion in loans to help Sri Lanka

Amid all the economic disasters faced by the country, China plans offering a $1.5 billion credit facility to Sri Lanka and the final decision in this regard is expected to be out soon. The Chinese ambassador named Qi Zhenhong told reporters that the country is also planning to give a separate loan worth $1 billion, on request by the Sri Lankan government.

He further disclosed that the South Asian nation was given a loan worth $500 million from the China Development Bank on March 18.  To give an answer to the question, How much is Sri Lanka in debt?? The Sri Lanka government has to repay almost $4 billion worth of debt this year, which consists of a $1 billion international sovereign bond maturing in July. But the reserves of the country decreased to $2.31 billion in February, lower by 70% from the last 2 years.

The country is also facing difficulties to pay for imports like fuel & medicines and asking countywide power cuts due to limited supply of fuel for power generation.

Will the government’s response help the economy?

Mr. Rajapaksa’s desire to make the nation fully organic is likely to result in a significant drop in domestic food production and on the other hand will increase the overall prices manifolds. Also, the government took many steps to handle the crisis which actually made everything bad. The capping of food prices resulted in shortages as there was a significant gap in supply and demand of food items and rates that are decided by the government. The citizens of the country have to queue up for endless hours to purchase essential goods due to increasing shortages.

The strong-arm plans of the army might also bring some consequences. When supplies are limited from traders, they are least interested in bringing new supplies amongst the customers, which might result in further decline in supplies and will increase the overall cost of important goods.

What are economists’ and experts’ opinions regarding the crises?

As per a report, the country’s official reserves decreased by $780 million to $2.38 billion in January. In December last year, the reserves were $3 billion. Along with the current economic recovery, the country is also facing serious challenges, like public debt which has increased significantly, less international reserves, and more dependence on loans.

The IMF has called for priority reforms to look after the country’s economy and as per the analysts, the country’s next big challenge is to repay the $1 billion bonds due in July.

The country is witnessing many protests due to the worst economic crises and through these masses, the people are showing their anger and dissatisfaction. Many anti-government protests are also demanding the resignation of President Gotabaya Rajapaksa fearing the Sri Lanka economy will collapse in the future.


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