Sri Lanka, a 22-million-strong South Asian island nation, is experiencing “an economic and political crisis,” sparking mass protests and forcing government officials to resign. Sri Lanka’s poverty rate (at the $3.20 per day poverty line) was 10.9 percent in 2021, according to the World Bank. However, Sri Lanka’s economic crisis could exacerbate the country’s poverty. Sri Lanka’s economic crisis is the worst since the country’s independence in 1948, with mounting debt and record-high inflation.
Reasons of Sri Lanka’s crisis:
- Agri-food Crisis: In 2021, the Rajapaksa government decided to prohibit the use of chemical fertilizers in order to transition to 100% organic agriculture. The rice and sugar industries, in particular, saw their yields plummet. The government has since partially lifted the ban.
- Government poor management: Instead of supporting the local economy and increasing exports, the Sri Lankan government has taken out large loans to fund public services and imported goods. As a result, the government’s debt has risen from “94% of GDP in 2019 to 119 percent of GDP in 2021.” Furthermore, the government paid off the debt with its foreign exchange reserves, “reducing its reserves from $6.9 billion in 2018 to $2.2 billion in 2022.” As a result, the country lacks the foreign currency necessary to finance imports.
- Lack of foreigners Reserves:
Sri Lanka has “been running a trade deficit for decades.” As a result, foreign currency has been depleted, “leaving traders unable to pay for imports.”
- Russia-Ukraine Conflict:
The ongoing conflict between Russia and Ukraine has resulted in astronomical “crude oil, sunflower oil, and wheat price inflation.” At the height of the crisis, “crude oil prices hit a record high” of more than $125 per barrel. Such drastic increases in fuel and commodity prices have harmed the lives of ordinary Sri Lankans.
- Hits to the Tourism Industry:
In April 2019, three luxury hotels and three churches across the country were bombed by the “local militant group National Thowheed Jamath (NTJ),” killing nearly 270 people. The bombings had a significant impact on the tourism industry, and the pandemic only slowed things down. Such setbacks have harmed Sri Lanka’s ability to repay its debt, given that tourism accounts for more than 10% of the country’s GDP.
- Tax Cuts That Were ill-advised: In an attempt to revive the economy, the government cut taxes. However, this had the unintended consequence of severely reducing government revenue. “Rating agencies downgraded Sri Lanka to near default levels” as a result of the action, and the country “lost access to overseas markets.”
The major Asian countries’ contributions to Sri Lanka’s crisis are:
Sri Lanka’s economic crisis resulted in the country’s needing for financial support from Asian countries like China and India.
- India:
India has been very generous with its aid. In February 2022, it gave Sri Lanka a $500 million credit to “fund the country’s fuel purchases.” India agreed to give Sri Lanka “a $1 billion line of credit for food, medicine, and other essential items” in March 2022. In the coming months, it also promised to send 300,000 tonnes of rice to Sri Lanka. Sri Lanka has already received $2.6 billion from the Indian government.
- China:
China becomes the wild card in the Sri Lank crisis. China provided Sri Lanka with $1bn (£690m) to become the island’s biggest donor, giving tens of millions of dollars. In March 2022, China aided with a $1.5 billion credit, a $1 billion loan, and 2,000 tonnes of rice shipments.