Explained: What Has Caused Sri Lanka Economic Crisis

On one hand, where the whole world is getting impacted by the Russia-Ukraine war, India’s neighboring country Sri Lanka is going through an economic crisis. People are facing a scarcity of food, milk, fuel, and money to survive which has led to mass protests against President Gotabaya Rajapaksa. Sri Lanka's Economic Crisis has affected India too as several people are seeking refuge in India.

Know the reasons behind the Sri Lanka Crisis 

The country was already in bad condition before the pandemic when its GDP was only 2.25%. Lockdown pushed it further affecting the informal sector badly. But that is the only reason behind the Sri Lanka crisis. The reasons described below resulted in this:

1. Depletion of Forex Reserves

Sri Lanka relies heavily on tourismwhich is the third-largest revenue earner of the country.  In 2019, Islamist suicide bombings in 3 churches and luxury hotels in Colombo affected tourism by 70%.

President Gotabaya Rajapaksa’sbig promises to the public are one of the reasons behind the Sri Lanka crisis. He promised to reduce the tax on value-added services by 15% in order to improve the country’s economic growth.

But the result was completely opposite, the country incurred a loss of billions due to low revenue generated from the tax.

5. China's Debt Trap

These five reasons brought Sri Lanka closer to an end where common men are fighting for fuel and food. Army troops have to be deployed at fuel stations and students are forced to quit exams because of paper and ink scarcity.

India has extended monetary support to the country by announcing a $400 million swap by RBI and an additional $500 million credit line for purchasing fuel.