The Sri Lankan Economic Crisis

The Sri Lankan Economic Crisis
A refresher on how paradise became bankrupt

How do you bring a country into an economic crisis? How do you make the prices of rice to ₹500/kg, sugar to ₹300/kg and milk to ₹800/kg? How dire do you need to be to take away opportunities from the future of your country? To cancel their exams? Why do you need to keep your population in darkness for 13 hours daily? What went wrong? Why is Sri Lanka facing an economic crisis?

Let’s discuss this in parts starting with what the crisis actually is. In a nutshell, the Sri Lankan crisis is a result of two things - wrong economic policies and depleting forex reserves.

But, why is there an economic crisis?

Tourism contributes to 10% of Sri Lanka’s GDP and tourists bring foreign currency into the country. The ester bombings of 2019 already had shaken the tourism industry but COVID and the lockdowns that ensued further shrank the economy by about 4%.

In May 2021, the government decided to go fully organic and banned the import of all chemical fertilizers. This impacted tea farming and associated industries further worsening the economic condition.

Sri Lanka’s troubles don’t seem to end. Economic contraction aside, Sri Lanka has borrowed heavily to pursue developmental and infrastructure activities. While most of these loans were long-term with really low-interest rates, recently the country has started to rely on International Sovereign Bonds (ISBs) to raise money, which generally has a high interest rate and relatively shorter payback period. As things are, Sri Lanka is $51B in debt with most of it from ISBs, Asian Development Bank, Japan, China, etc.

If Sri Lanka falls into a recession, it not only affects the country but also its trading partners. Hence, countries like India and China are scrambling to provide aid to the country and ensure that critical supplies are met. India has facilitated a $1Bn credit line and also a $400mn currency swap agreement.

With the dwindling economic conditions of the country, what Sri Lanka really needs is a bailout from the IMF, which of course comes with its own set of conditions like no more freebies, rising tax rates, and more power to the central bank. With the situation as dire as the army being deployed to control the stocks of rations, Sri Lanka now sits at the edge of a humanitarian crisis and India and other neighbouring countries at the edge of a refugee one.