Sri Lanka is facing an economic crisis. Is it on the verge of bankruptcy?
Most settlements were financially self-sufficient a few millennia ago, and they provided the residents with whatever they required. Even though the world has become a village, modern states are rarely self-sufficient. They sell their excess and work hard to acquire and save foreign currency. They also import to compensate for their shortcomings. Sri Lanka’s present issue is a lack of funds to purchase what it requires from the outside world.
Colombo is known for its beautiful beaches, clean streets, historic buildings, delectable cuisine, and friendly people. The Sri Lankan capital and the rest of the country have gradually returned to normalcy, leaving behind the sad memories of the decades-long civil war that ended in 2009 and the 2019 Easter bombs. However, all of that progress appears to be going up in flames as the country faces a severe economic crisis, putting it on the edge of bankruptcy. Since January, things have become worse, without food and gasoline costs, as well as debilitating shortages. The island country of 2.2 crore inhabitants cannot acquire essentials such as rice, milk, and kerosene because its foreign exchange reserves are practically gone.
President Gotabaya Rajapaksa, who has been dubbed “Terminator” by his fans for bringing the civil war to an end, said his country would engage with the International Monetary Fund (IMF) to address the issue. He blamed past governments for the economic crisis. While those who caused the problem criticised the administration, he is working to address it and bring assistance to the people,” Gotabaya explained. However, the president’s answer has not been warmly received by the public. Anger, impatience, and desperation to get whatever food and gasoline people can are regular sights on Colombo’s streets. In numerous instances, armed personnel have been sent to control gasoline deliveries.
Economic uncertainty, tax cuts, and significant fiscal deficits supported by printing more money are the main issues. Following that, Sri Lanka’s debt was downgraded, effectively shutting it out of the capital markets. The nation was unable to refinance maturing loans or finance a fast expanding current account deficit as a result of fiscal growth. They then attempted to limit imports and regulate the currency rate, which resulted in shortages.
Following his election as president, Gotabaya enforced import restrictions and executed an ill-advised tax cut, which wreaked havoc on the country’s already ailing economy. To avoid foreign currency outflows, he restricted the import of luxury automobiles, chemical fertilisers, and spices like turmeric. In March 2020, a restriction on motor vehicle imports went into force. Before the prohibition, Sri Lanka was spending roughly $400 million per year on fertilisers imports. Imports of vehicles totalled $1.5 billion.
The abrupt policy switch caused extraordinary issues for a country like Sri Lanka, which has previously relied on large-scale imports for most necessary goods. It wreaked havoc on the industrial sector, particularly the garment industry. Even buttons are imported by the Sri Lankan clothing industry. How can they maintain quality in exports if imports are halted? Raw materials are imported into Sri Lanka, according to Kopalapillai Amirthalingam, an economics lecturer at the University of Colombo.
Due to the apparent epidemic, Sri Lanka has already lost a significant portion of its vital tourism earnings. The import restriction and tax cuts have further harmed the cash flow. Inflation has soared since 2020, foreign currency holdings have dropped by 70%, and the farming economy has been decimated by a blanket ban on artificial fertilisers. The issue has been exacerbated by the Sri Lankan Central Bank’s short-sighted monetary policies and the interest rate ceiling on bonds.
The fertiliser prohibition, too, proved to be a disaster. 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. Food scarcity had been predicted by agricultural specialists and economics. The restriction resulted in a 25% loss in production, said Saman Dharmakeerthi, a professor of soil health and plant nutrition at the Kandy’s University of Peradeniya. Paddy cultivation in the Northern and Eastern Provinces has severely decreased. Tea production, which is one of the economy’s pillars, was also severely harmed. The production of pepper, cinnamon, and vegetables decreased by 30%.
The agriculture business had lost nearly half of its output capacity by the time the government recognised its error and reversed the prohibition. As a result, the government had to depend on other nations even more for rice and other necessities. Last year, Sri Lanka from Myanmar agreed to purchase one lakh tonnes of white rice and 50,000 tonnes of parboiled rice. In addition, it imports grains from India.
Other issues have arisen as a result of the conflict in Ukraine. Russia and Ukraine supply 45 per cent of Sri Lanka’s wheat, more than half of its soybeans, sunflower oil, peas, and asbestos. International oil prices have risen dramatically as a result of the war. Also, according to Colonel R. Hariharan, a retired military intelligence officer, both Russia and Ukraine are big importers of Sri Lankan tea.
Besides, the administration of Gotabaya is unsure how to handle the problem. Even after two parliamentary sessions on the matter, it could not agree on a recovery plan. Sri Lanka has now turned to India and China for assistance. India extended a billion-dollar line of credit to buy food, other critical goods, and pharmaceuticals during Finance Minister Basil Rajapaksa’s visit to Delhi on March 17. China said it was evaluating a billion-dollar loan and a $1.5-billion credit line a few days later.
Colombo has also sought assistance from the IMF. However, there aren’t many dreamers on the island country at the moment. Sri Lanka, according to Kadirgamar, is unlikely to emerge from the crisis quickly. Raising more money before addressing the fundamental concerns, according to Vimana, will only make things worse. The only way out is to implement economic changes. The sort of adjustments required will be extremely difficult and unpleasant, and it is challenging to see how politicians would embrace them. Sri Lanka may be able to return to where it was in 2019 with some stability. Debt restructuring might take 18 to 20 months, and resuming growth could take even longer.
Edited by Prakriti Arora