Srilanka Updated

SRI LANKA ECONOMIC CRISES
INTRODUCTION:
 Sri Lanka is facing the worst economic crisis since its independence in 1948.
 The Sri Lankan economy has completely collapsed, as then Prime Minister
Wickremesinghe declared a few weeks ago.
 Sri Lanka finds itself in a financial crisis that has led to a rise in external debt,
depleted foreign exchange reserves, a currency in freefall, and high, double-digit
inflation. I will look at some of the factors that have contributed to the nation’s
economic downfall, including
 consolidation of political power,
 hyper-populist policies, and an ill-thought push towards organic agriculture.
 Further, I will evaluate the impact that the situation has had on the nation in the
form of
 political instability,
 shortages of essential items,
 galloping inflation, and disgruntled citizens.
 Rajapaksa’s unwillingness to seek help from the International Monetary Fund
(IMF) earlier.
 Everything that could go wrong with the economy has:
 Sri Lanka faces budget and current account deficits
REASONS OF ECONOMIC CRISIS

There are some key economic challenges that have created a proverbial perfect storm for Sri
Lanka:
 The State Of The Domestic Economy

 Balance of Payments (BOP) crises
 Successive IMF Loans
 The unwarranted agricultural reforms contributing to FOREX scarcity and soaring
inflation
 The downfall of the tourism sector
1-DOMESTIC ECONOMY
Sri Lanka is facing its worst economic crisis yet since the country’s independence from British
colonial rule in 1948
 The 26-year-long civil war that ended in 2009 had a massive impact on the
fundamentals of Sri Lanka’s domestic economy.
 The global financial crisis of 2008 drained the country’s forex reserves, and economic
mismanagement by a succession of governments caused the twin challenges of budget
shortfall and Balance of Payments (BOP) deficits.
 COVID-19 relief measures have further weakened the domestic economy structurally.
SRI LANKA’S REAL GDP GROWTH RATE (2010-2020)

The country’s GDP growth rate had plummeted from 8.01 percent in 2010 to (–) 3.56 percent
in 2020 when the pandemic hit.
2-Balance of Payment Deficit

 Sri Lanka is experiencing a classic case of the ‘twin deficits’ hypothesis: that an economy’s
current account moves in the same direction as its fiscal account.
 Establishing the link between the two, we have:
CA = (𝑆p−𝐼) + (𝑇 − 𝐺)
Where
 CA is the current account balance
 Sp is the total private savings
 I is the private investment expenditure
 T is the Government tax revenue
 G is the Government spending (including transfers)
Hence the total Government savings Sg = (𝑇 − ) denotes the fiscal account balance.
3-IMF BAILOUTS
 The last two decades have seen a series of BOP crises in Sri Lanka, and the country has
sought a number of bailouts from the International Monetary Fund (IMF).
 In 2009, IMF extended a loan with the condition that budget deficits will be reduced to 5
percent of GDP by 2011.
 With no improvement in growth or export, the country requested the IMF in 2016 for
another round of debt amounting to US $1.5 billion with some new clauses.
 The IMF package caused effect to the economy’s health, and growth rate fell from 5 percent
in 2015 to 2.9 percent in 2019.
 During the same period, government revenue also contracted from 14.1 percent to 12.6
percent of GDP.
 Sri Lanka, despite its severe BOP crisis, did not immediately seek assistance from the IMF
given its previous track record of faltering economic recovery. Eventually, however, sheer
desperation drove Sri Lanka to IMF once again.
4-AGRICULTURAL REFORMS, FOREX CRUNCH, AND INFLATION

 GOTABAYA RAJAPAKSA, outlined a 10-year vision for transition into complete organic
farming in Sri Lanka.
 In April 2021, the Sri Lankan government decided to completely ban the import of
agrochemicals to mitigate the health impacts of chemical fertilizers and pesticides in
farming, and also to promote eco-friendly sustainable agricultural systems.
 The ill-advised and sudden switch to organic farming could be considered the final nail in
the coffin for Sri Lanka’s economy.
 As the new methods of production were more costly with lower yields, this agricultural
policy led to serious impacts on the country’s economy.
 Rice production quickly fell by 20 percent, leaving nearly 33 percent of agricultural land
unused and increasing rice prices by 50 percent in only seven months.
 The tea industry—which was once a major commodity of exchange—incurred losses of
some US$ 425 million.
 Between June 2021 and April 2022, Sri Lanka’s FOREX reserves were drastically reduced
from US$ 4.06 billion to US$ 1.92 billion.
Trends in Sri Lanka’s Dwindling FOREX Reserves (in US$ million)
5-DOWNFALL OF TOURISM
 Sri Lanka’s tourism sector accounts for 12 percent of the country’s GDP and is the fifth largest
source of foreign currency in the economy.
The industry has been severely damaged by the island nation’s deepening economic crisis, out-
of-control gasoline costs, and power outages.
In 2018, tourism brought in US$ 4.4 billion and contributed 5.6 percent of GDP, but this was
reduced to just 0.8 percent in 2020, amidst the pandemic.
The severe impact of the tourism sector on the GDP is the cumulative effect of a number of
crises faced by the economy in a consecutive manner.
Sri Lanka’s Tourist Numbers in 2019 and 2020

EXTERNAL DEBT AND THE CHINA FACTOR
Before Sri Lanka’s graduation to a middle-income country in early 2000s, most of its foreign
debt came in the form of concessionary funding from multilateral organizations such as
 The World Bank

 Asian Development Bank
 Japan International Cooperation Agency
It got favourable loan conditions as a low-income nation—i.e., low interest rates (1 percent or
less) and longer repayment periods aided FOREX management to not lead into a BOP crisis.
However, as access to concessionary loans declined, the economy shifted to a new structure of
foreign debt composition with an increasing proportion of commercial loans, mostly in the form
of ISBs. Although Sri Lanka’s foreign debt-to-GDP ratio has reduced dramatically over the last
two decades, the change in the total structure of the external debts has made the economy
more vulnerable to currency crises in the last few years.
SRI LANKA’S FOREIGN DEBT COMPOSITION (2004 – 2019)

COVID 19 EFFECTS ON ECONOMY
COVID-19 has effects adversely for Sri Lankan economic income earning sector such as
 Tourism
 Food and agriculture
 Exports of apparels and textiles
 Small and medium scale enterprises
 As well as there is massive drop in educational system and many other socio-economic
setbacks.
Sudden price raises of goods in the market such as turmeric powder, sugar, gas, bakery items
are unbearable for the most of Sri Lankan people. This is evidence which says that people are
facing serious problems such as unemployment and economic recession.
The sudden economic down turn means that Sri Lanka is likely to face high unemployment,
inflation and poverty rates in the future.

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SRI LANKA ECONOMIC CRISES

REASONS OF ECONOMIC CRISIS

 The State Of The Domestic Economy

SRI LANKA’S REAL GDP GROWTH RATE (2010-2020)

2-Balance of Payment Deficit

4-AGRICULTURAL REFORMS, FOREX CRUNCH, AND INFLATION

Trends in Sri Lanka’s Dwindling FOREX Reserves (in US$ million)

Sri Lanka’s Tourist Numbers in 2019 and 2020

 The World Bank

SRI LANKA’S FOREIGN DEBT COMPOSITION (2004 – 2019)

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