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The ongoing economic crisis in Sri Lanka is the epitome of a dual deficit economy, with exports lower than imports and national income lower than national expenditure.
The actual cause behind ongoing economic crisis in sri lanka for today’s conditions are accumulative borrowings, lack of foreign currency, record inflation, and crucial sectors witnessing a sharp fall.
These reasons have not only created political turmoil, but also dragged Sri Lanka into an unprecedented economic crisis.
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Prima facie the condition of the ongoing economic crisis in Sri Lanka is due to economic mismanagement by every elected government. It is a string of ill decisions taken by the successive governments such as depending on organic farming completely and banning the use of chemical fertilizers.
It is also a result of the deep tax cut, as promised by president Rajapaksa in 2019. All Sri Lankan are facing 13 hours of electricity shortage, lack of food supplies, inflation touching 17%, and badly devalued Sri Lankan currency.
People have been standing in lines for a long hour to get some fuel. Sri Lanka has experienced huge inflation, and the government has been working to tame the same.
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Here are some of the major reasons for the actual cause behind the ongoing economic crisis in Sri Lanka.
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1. Shortage of Foreign Reserves
Sri Lanka has defaulted on its $51 billion foreign debt today as the island nation grapples with the worst economic crisis in memory and widespread protests swell demanding the government’s resignation ~ AFP
Acute food and fuel shortages, alongside long daily electricity blackouts, have brought widespread suffering to the country’s 22 million people in the most painful downturn since independence in 1948
Public anger has flared in recent weeks with crowds attempting to storm the homes of government leaders and security forces dispersing protesters with tear gas and rubber bullets
Sri Lanka’s finance ministry said the country was defaulting on all external obligations, including loans from foreign governments, ahead of an International Monetary Fund bailout
Originally tweeted by Newsroom (@MaudhuiHouse) on April 12, 2022.
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The Sri Lankan government has mismanaged the foreign funds. This has been done successively by every government. The government has depleted almost 70% of the foreign reserves.
Now only $2.31 billion are left with the Sri Lankan government in their reserves. The debt repayment of the government is almost $7 billion. Sri Lanka is highly dependent on imports for very essential products, such as pulses, cereals, and sugar.
This import for these items further meltdown the foreign reserves of the island nation. The majority of foreign reserves are gone in the import bills. President Rajapaksa has given an estimated trade deficit of $10 billion in this fiscal year.
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2. Effects of Pandemic
2019–present Sri Lankan economic crisis: Since 2010, Sri Lanka witnessed a sharp rise in foreign debt, reaching 88% of the country’s GDP in 2019. The onset of the COVID-19 pandemic induced global recession accelerated the… http://dlvr.it/SMth7J #SLChronicle #Srilanka #LK
Originally tweeted by Financial Chronicle (@ChronicleLK) on April 3, 2022.
Sri Lanka is a beautiful country with mesmerizing coastal lines. Sri Lanka welcomes thousands of travelers every year. Sri Lanka has travelers from three key countries viz. India, Russia, and the United Kingdom.
However, with the ban on international travel during covid times, the tourism industry in Sri Lanka was badly hit.
The island country gets almost 10 percent of its GDP through tourism. It was badly hurt by the pandemic. This was another reason for the loss in GDP and earnings of the country.
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3. Russia-Ukraine War-Induced Inflation
Since the end of February, Russia and Ukraine have been at war. This war has induced inflation and that too steep inflation of crude oil, wheat, and sunflower oil. The crude oil prices have reached $125/barrel, which is a record high in 14 years.
This war has also disrupted supply chain management and brought inflation to many countries. But a country like Sri Lanka has got a major hit because of this war.
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4. Agro Sector Crisis
Rajapaksa government decided to ban all chemical fertilizers in the previous year. This ban forced the farmers to shift to 100 percent organic farming. However, the yield of the crops was not as high and pushed the government for some imports of food grains.
The country’s farm production was severely hit. The hit in the production of rice and sugar compelled the government to reverse its decision to shift to organic farming.
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5. Sharp fall in FDI
President Gotabaya Rajapaksa was in rule when Sri Lanka saw a drastic reduction in Foreign Direct Investments. As per the figures in government data, FDI was only $548 million in 2020, which had dropped from $1.6 billion in 2018 and $793 million in 2019.
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6. Investment by China
For the past two decades, Sri Lanka has adopted the growth strategy of China. The strategy is an infrastructure-centric growth model. This was adopted with the hope of creating jobs and bring in prosperity to the nation.
For the growth, Sri Lanka looked at China for investment to fund the infrastructure projects. It is said that China has invested almost $12 million in infrastructure projects in Sri Lanka.
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The investment was done over a period from 2006 to 2019 and still continues to fund the infrastructure projects. The major infrastructure projects are Colombo Port City, Hambantota port, etc. China has invested in the Colombo Port City, which is being built by Chinese state-owned enterprises.
The company is called China Communications Construction Company which invested almost $1.4 billion. The project is expected to complete in 2043. Sri Lanka cannot earn any revenue from the project for close to two decades.
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7. High Interest on Loans
Growth does not come for free and needs to pay for the growth. Chinese have given loans to Sri Lanka but charged a whopping interest rate of 6.5 percent per annum. Inspire that Asian Development Bank gives an interest rate of 2.5 – 3 percent per annum.
Sri Lanka gave away almost 83 percent of its revenue to repay the debt. Sri Lanka is under crushing external debt. To release the pressure, Sri Lanka chooses to repay the debt by leasing part of the infrastructure to China.
Sri Lanka accepted to hand over the Hambantota port project to China after completion while 43 percent of the reclaimed land of Colombo Port City will be leased to China for a 99 year’s lease period.
Sri Lanka has no other way to finance the project and has succumbed to the pressure to repay a debt by leasing the project to China.
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8. Extension for Credit Limit
Sri Lanka appealed to China to extend the credit line so that the burden would be eased a bit. However, China did not agree to the request by Sri Lanka. Experts say that there could be two reasons for the refusal by China.
The first reason could be a bad precedent for other nations which borrowed money from China.
The second reason could be the failure of China, as Sri Lanka’s development model is based on China’s model. These are the various reasons for the downfall of the economy of Sri Lanka. The current problems can be attributed to short-term blunders done by the Sri Lanka government.
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However, with deep study, the fall could be because of heavy investment by China in Sri Lanka’s infrastructure project. The influence of China on repaying the debt has pushed Sri Lanka to take more debt to build on economically viable projects.
China has accounted for almost 30 percent of FDI into Sri Lanka. Chinese loans and equity have funded almost 50 major and minor projects. The estimated worth of these projects is $11 million. With the huge debt and loans for growth, Sri Lanka has been in a deep economic crisis.
The country still has a fear that it won’t be able to repay its debts and may be lost in the economic crisis forever. All these reasons have got Sri Lanka into economic and political turmoil.
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Sri Lanka Crisis: FAQ
Why sri lanka economic crisis
The main reasons for today’s conditions in Sri Lanka are accumulative borrowings, lack of foreign currency, record inflation, and crucial sectors witnessing a sharp fall. These reasons have not only created political turmoil, but also dragged Sri Lanka into an unprecedented economic crisis.
Why sri lanka economy in crisis
The main reasons for today’s conditions in Sri Lanka are accumulative borrowings, lack of foreign currency, record inflation, and crucial sectors witnessing a sharp fall. These reasons have not only created political turmoil, but also dragged Sri Lanka into an unprecedented economic crisis.
How financial crisis affected sri lanka
Prima facie the condition of the ongoing economic crisis in Sri Lanka is due to economic mismanagement by every elected government. It is a string of ill decisions taken by the successive governments such as depending on organic farming completely and banning the use of chemical fertilizers. It is also a result of the deep tax cut, as promised by President Rajapaksa in 2019.
What is financial crisis in sri lanka
Experts say that there could be two reasons for the refusal by China. The first reason could be a bad precedent for other nations which borrowed money from China. The second reason could be the failure of China, as Sri Lanka’s development model is based on China’s model.
What is sri lanka crisis
Accumulative borrowings, lack of foreign currency, record inflation, and crucial sectors witnessing a sharp fall. These reasons have not only created political turmoil, but also dragged Sri Lanka into an unprecedented economic crisis.
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