Sri Lankan economic crisis

Do you know about the recent Sri Lankan economic crisis? What could be the possible reasons that have led to such a situation? Read further to know more.

A United Nations Development Programme survey conducted in 2022 and 2023 found that 55.7% of Sri Lanka’s population, or 12.34 million people, are vulnerable across various dimensions due to the economic crisis.

The study spanning the years 2022 and 2023 and covering 25,000 households across the country, found 55.7 % of the population to be vulnerable across three dimensions — education, health and disaster, living standards — and 12 indicators, including school attendance, the physical condition of health, unemployment, and indebtedness.

What has been happening in Sri Lanka?

The economic crisis in Sri Lanka began in 2019 and is still present now. This economic crisis is the greatest the nation has faced since gaining independence in 1948.

It has caused previously unheard-of levels of inflation, a close-to-complete depletion of foreign exchange reserves, a lack of medical supplies, and a rise in the cost of necessities.

The 2019 Sri Lanka Easter bombings, the COVID-19 pandemic’s effects in Sri Lanka, tax cuts, money creation, a national policy to switch to organic or biological farming and other compounding causes are all credited with starting the problem.

The demonstrations in Sri Lanka in 2022 were a result of the ensuing economic woes.

What has caused the Sri Lankan economic crisis?

Background: Sri Lanka’s 26-year-long civil war ended in 2009. Its post-war GDP growth was reasonably high at 8-9% per annum till 2012. However in 2013, when global commodity prices fell, exports slowed down and imports rose.

The global financial crisis of 2008 also drained the country of its forex reserves.

Terror attack: The Sri Lankan economy is heavily dependent on tourism. The recent pandemic and the subsequent lockdowns have further deteriorated financial stability. The easter bombing of April 2019 resulting in 253 casualties has also affected tourist inflow.

Fertilizer ban: In 2021, All fertilizer imports were completely banned and this has severely affected agricultural productivity. This overnight shift has impacted food production and finally led to the declaration of an economic emergency

Debt trap diplomacy: Chinese investment in the Hambantota port and the subsequent debt created further economic deterioration

Way forward for Sri Lankan Economy

As soon as the country’s shortage of a few vital goods ends, which is anticipated to happen before the start of the Sinhala-Tamil New Year, the government should take steps to restore the economy of the nation (in mid-April).

• The government should also work with the Tamil political elite to design a plan for the economic growth of the war-torn provinces in the north and east, which are among the hardest hit by the current crisis.
• To reduce borrowing, especially sovereign borrowing from external sources, it would be desirable to increase domestic tax collection and reduce government spending.
• To restructure the management of concessions and subsidies, tough steps should be applied.

India’s Assistance: It would be incredibly foolish for India to stand by and allow the Chinese to annex ever-larger portions of Sri Lanka. India must provide Sri Lanka with financial aid, political counsel, and investments from Indian businesspeople.

• Businesses in India must create supply chains that link the economies of Sri Lanka and India for a variety of products and services, from the export of tea to information technology services.
• More than any other country, India should guide Sri Lanka toward realizing its potential and reaping the benefits of a secure, cordial neighborhood.

Preventing Unlawful Refuge: With the reported arrival of 16 people from Sri Lanka by illegal means, the state of Tamil Nadu has already begun to experience the effects of the problem.

• After the 1983 anti-Tamil pogrom, over three lakh refugees lived in Tamil Nadu.
• The authorities in India and Sri Lanka should watch out that the current issue is not exploited to increase smuggling and trafficking or inflame feelings in either nation.

Crisis as an Opportunity: Tense relations between India and Sri Lanka are unaffordable. It is India’s responsibility to be extremely patient and to engage Sri Lanka significantly more frequently and intimately because it is a much larger country.

• Additionally, we must intensify our efforts to advance the human condition while rigorously avoiding meddling in Colombo’s internal matters.
• The crisis should be utilized as a chance for New Delhi and Colombo to negotiate a resolution to the long-running fisheries issue in Palk Bay.

To read more about India-Sri Lanka relations, click here.

Also read: IMF bailout

Practice question

• Analyze the implications of the Sri Lankan economic crisis on India-Sri Lanka bilateral relations ( 10 marks,150 words)

Post your answers in the comment section.