Here is why Sri Lanka is in economic crisis
The tear drop shaped nation with a population of 22 million is reeling under an economic crisis due to mismanagement by successive governments. The problem hit a boiling point with the present Government’s decisions on several economic issues.
Continued rise in oil and gas prices since 2019, the Easter bombings and COVID-19 pandemic added to the already troubled nation. Hugely dependent on tourism and agriculture, Sri Lanka’s economy took a beating as tourist arrivals fell and the government’s decision to no chemical fertilizer use for agricultural purposes resulting in dip in rice production.
The rapidly depleting foreign exchange reserves led to shortages of essential goods and people coming onto the streets in protest. According to the World Bank, the set back is equivalent to five years’ worth of progress.
Reasons for the fall…
- Foreign exchange reserves plummeted by almost 70 per cent in two years.
- Deficit nation: The country’s national expenditure exceeds its national income, and that its production of tradable goods and services is inadequate.
- Deep tax cuts promised by Rajapaksa during a 2019 election campaign affected Sri Lanka’s economy.
- Huge dip in tourist arrivals added to Sri Lanka’s woes
- The Rajapaksa government’s decision to ban all chemical fertilisers and go fully organic has proved costly. It led to drop in rice crop.
- Sri Lanka’s foreign debt at $12.55 billion, with the Asian Development Bank, Japan and China among the other major lenders.
- In the meanwhile Sri Lanka and India have signed a $1 billion credit line for importing essentials, including food and medicine, and the Rajapaksa government has sought at least another $1 billion from New Delhi.
Tourism accounts for 10 per cent of the GDP but with the economic crises, UK and Canada warned its citizens against travelling to the island nation. Russia too is a major source of tourism and the on-going war with Ukraine too has affected tourism.
As of November, foreign currency reserves available with the country were just $1.58 billion, down from $7.5 billion when Rajapaksa became the president in 2019. With forex reserves dropping from over $7.5 billion in 2019 to around $2.8 billion in July 2021, the supply of foreign exchange was hit while increasing the amount of money that Sri Lankans have had to shell out to purchase the foreign exchange necessary to import goods.
