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.
via;prothomaloenglish
The country’s GDP fell to the lowest ever in a decade during a pandemic, it was -3.56% as per Central bank of Sri Lanka. This year, its projection might be above the zero line but it’s not enough to improve the condition of people and its country. How did Sri Lanka fall into this situation?
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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
via:thefinancialtimes
Its foreign exchange reserve was around $8 billion before 2020 which fell by 70% after the pandemic leaving only $2.31 billion in the reserve.
2. Low Income From Tourism
Sri Lanka relies heavily on tourism which 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%.
via:financialtimes
Even before the country could recover from the loss, the coronavirus pandemic hurt the tourism sector badly. Only $2.8 billion in revenue was generated last year which was $7.5 billion in 2019.
It also reduced the remittances from Sri Lankan workers in abroad, as a result, the country’s income in dollars was cut to $5.5 billion.
3. Too Much Dependence on Import
via:indiatimes
Sri Lanka depends heavily on China and India for the import of essential products like sugar, fuel, pulses, and medicines. These two importers share a total value of 53%. Reduction in foreign money prevented countries to buy these essentials.
Among all products, the deficiency of coal and oil led to a power crisis. The country has now diesel left for only 2 days as per CPC (Sri Lanka’s main fuel retailer).
4. Tax Cut and Public Debt
President Gotabaya Rajapaksa’s big 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
via:orf
Sri Lanka and China entered into a swap agreement in 2020, according to which the country got $1.5 billion during the pandemic for bilateral trade. The agreement restricted Sri Lanka to use that money for paying ISBs following which country took another $1 billion from China to pay the debt.
All this has raised public debt to 119% of its GDP and foreign debt to $35 billion.
6. Ban on Chemical Fertilizers
via:farmfactory
The government’s new stunt to boost organic farming in the country by banning the use of chemical fertilizers fueled the Sri Lanka crisis. 90% of farmers were dependent on these fertilizers which led to a reduction in food production and an increase in food prices.
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.