Economic crisis in Sri Lanka reflects mismanagement
Vinod Chandrashekhar Dixit
Sri Lanka is facing the double whammy of rising prices and high debt and its people are bearing the brunt of it as the domestic situation turns increasingly grim. Rising prices and the nation’s debt crisis have turned the situation extremely grim. There have been extreme food shortages as private banks have run out of foreign exchange to finance imports.
Sri Lanka’s economy is now in shambles. Sri Lanka is heavily dependent on imports. With forex falling, the government has not been able to pay for fuel and even food imports. The mismanagement of government funds, ill-timed tax cuts as well as the impact of the Covid-19 pandemic has adversely affected the economy.
Sri Lanka has the highest rate of inflation in Asia and over 500,000 of the country’s citizens say they have been pushed into poverty since 2020.Sri Lanka’s decision to completely ban all non-organic fertiliser around the time meant that farmers were forced to pay nearly double for organic fertilisers, passing off the cost to consumers.
The shortage of US dollars in the country has led to a ripple effect on the prices of most food items and raw materials that are essential for her food business. Sri Lanka’s foreign debt has increased steadily since 2014 (30 per cent of GDP), reaching 41.3 per cent of GDP in 2019, and this, in turn, has put a severe load on the country’s debt service.
The various news reports reveal the fact that Sri Lanka is now facing the worst economic crisis since gaining independence in 1948. The recession is attributed to foreign exchange shortages caused by the clampdown on tourism during the COVID-19 pandemic.Covid-19 dealt another blow to the island nation’s tourism-dependent economy aggravating the debt burden.
Furthermore, the effect of the Covid crisis, the loss of tourists, high government expenditure and tax cuts depleting state revenues, and the use of money for initiatives with minimal returns have all contributed to Sri Lanka’s economic meltdown. The Coronavirus pandemic, which originated in the Wuhan province of China, had restricted people to their homes. This proved fatal for the tourism industry across the globe, especially in Sri Lanka where tourism is a key source of foreign exchange.
Without adequate foreign currency reserves, the country has not been able to import fuel, food and other key goods. Hoarding of food items like rice and sugar is making matters worse. Milk has been rationed together with other food items, like rice and sugar. People are not able to bear the brunt of the current economic crisis and they have been shunning their meals at least once or twice a day – even avoiding tea and coffee to save money. Daily power outages have become commonplace and many Sri Lankans have been forced to collect firewood to power their homes.
China accounts for nearly 10 percent of Sri Lanka’s total foreign debt in the form of concessionary loans, though additional commercial loans through Chinese state banks have also been procured by Sri Lanka. The country has been seen as a prime example of the Chinese ‘debt trap’ narrative, where China aggressively pushes developing countries into building large infrastructure projects using Chinese loans.
In the year 2019, during election campaign, Sri Lankan President Gotabaya Rajapaksa had vowed to transform the country’s agriculture sector into 100% organic. On April 26 2021, he imposed a complete ban on the import of chemical fertilisers. The objective was to save import costs and the environment at the same time. The ban coincided with the Wuhan Coronavirus pandemic.
Many experts had warned the government that such a move could lead to food scarcity. Interestingly, the move was supported by both liberal groups and Christian churches. It is also reported that Sri Lanka’s organic farming policy was a disaster. In most countries, agriculture held up during the pandemic. But it was the opposite in Sri Lanka. According to IMF, there was a “worse-than-anticipated impact of the chemical fertilizer ban on agricultural production.
A major problem that Sri Lanka is facing is its huge foreign debt burden, and it owes over USD 5 billion to China alone. Sri Lanka’s foreign reserves are shrinking partly because of construction projects built with Chinese loans that are not making money. There is no doubt that Sri Lanka will have to seek World Bank assistance in addition to an International Monetary Fund (IMF) rescue plan to be discussed next month.
It has already received financial support from China and India in the form of credit lines and currency swaps. India has also recently offered credit and foreign exchange support, which includes a $500 million line of credit to help Sri Lanka purchase fuel. India has also extended a $400 million currency swap and deferred payment of $515.2 million to the Asian Clearing Union (ACU) by two months. India, Bangladesh, Pakistan, China and Qatar have agreed to provide economic assistance to Sri Lanka. But several sectors of the economy are on the brink of collapse.
It was India which came to support Sri Lanka in this crucial hour by extending urgent trade credit amounting to $1.5 billion on two separate occasions. Most Western outlets prove that China is the main culprit. In Nepal, most of the intellectual discussion is focused on the narrative of the Chinese debt trap. The crisis is widely seen as a result of mismanagement of government finances and ill-timed tax cuts, in addition to the impact of the COVID-19 pandemic. According to analysts the country needs to either restructure the debt or go to the International Monetary Fund for a relief package. The current economic crisis faced by Sri Lanka is the cumulative effect of the mismanagement of the finances of the country by successive governments leading to a situation where debts far exceed the forex reserves.
The worsening economic and energy crisis caused by a shortage of foreign exchange has resulted in long hours of power outages and scarcity of essentials. Meanwhile, India ferried a consignment of 40,000 metric tonnes of diesel to mitigate the spike in power cuts in the island nation. But it would take some time for Sri Lanka to emerge out of the woods.
The government, headed by President Gotabaya Rajapaksa, has been seeking credit lines from countries such as India, China and even Bangladesh for purchasing milk powder and diesel. The situation is so grim that the central bank is forced to buy oil from Iran by bartering tea leaves.
According to Global Strat View, Sri Lanka has to rethink seriously to save its economy from the debt-trap policy of the dragon. “First and foremost, President Rajapaksa must reconsider his policies to offer security to his own country by seeking the assistance of neighbouring countries such as India, which can work as a balancing wheel against China.
(The author is a columnist based in Jodhpur Tekra Ahmedabad)
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