Economic Crisis and Emergency in Sri Lanka

[GS Paper 2 – India’s Neighborhood, Bilateral Relations]

Sri Lanka is facing an unprecedented crisis due to economic mismanagement, corruption and an agricultural crisis. The Government has declared a countrywide emergency amid escalating protests over the economic crisis that has been witnessing a mounting anger in public. 

Key Highlights

• This is one of the awful crises spotted in decades in the South Asian Island nation.

• The country is facing acute shortages of essentials, food, a drastic increase in prices of commodities, and long power cuts.

• The population has over the days, demanded the resignation of the current government. Owing to which all the cabinet ministers sans the PM Minister Mahinda Rajapaksha have resigned from their posts.

• Numerous Sri Lankan citizens have fled to neighboring India in search of food and work..

Reasons behind the Economic-Crisis

Economic factors:

• Foreign exchange depletion results in a serious balance of payments (BoP) problem.

• 2009: 26-years long war emerged in Sri Lanka, post that, GDP was overall high at 8-9% (2009-2012).

• 2009: forex reserves drained due to the global financial crisis and war zone. The then Sri Lanka government obtained a loan of $2.6 billion from the International Monetary Fund with a condition that the budget deficit would be reduced to 5% of the GDP by 2011.

• 2013: GDP downed to half. Global commodity prices fell leading to a rise in imports and a steep fall in exports.

• 2016: The ruling government seeks the International Monetary Fund for another US$1.5 billion loan for a 3-years span under IMF’s conditionality of reducing the fiscal deficit by 3.5% by 2020.

• 2019:  GDP- drastically fell from 5% in 2015 to 2.9% in 2019, Investment Rate: 31.2% in 2015 to 26.8% in 2019.

• Gross Government debt was heavy and escalated from 78.5% of the GDP in 2015 to 86.8% of the GDP in 2019.

Other Factors:

• 2019: The Easter Bomb Blast in the capital in churches with 200+ casualties led to declining tourism with a sharp drop in foreign exchange reserves.

• The then government promised lower tax rates and wide-ranging standard operating procedures and brisk implementation of the process without a concrete policy led to more difficult situations

• 2020:  The Covid-19 outbreak led to an even fall in tourism, exports, and an increase in debt to GDP ratio.

• 2021: The Government declared a 100% Organic Farming nation overnight banning all fertilizers exports, which affected the local production.

• After the farmer’s protest, the policy was banned in November 2021.

• 2022: Agriculture fell, imports of food raised, inflation rose to 17.5%, exports fell due to a decrease in productivity. Economic emergency declared.

India’s assistance to Sri Lanka

• India has assisted the neighboring state by supplying rice and has extended a US $1 billion short-term concessional loan.
• India has extended economic relief to Sri Lanka in the following manner :

1. US $500 loan deferment
2. US $500 Line of Credit for fuel Imports
3. US $1.4 Billion- $400 currency swap

DO YOU KNOW?

• Currency swap – Refers to exchange of currencies in their own local currencies under certain terms and conditions.
• Line of Credit – In simple terms, it’s just like a credit card. It is not a grant but a soft loan provided at concessional interest rates to developing countries which has to pay back by the borrowing government.

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