Sri Lankan Economic Crisis
Economies of the world have slowly and gradually come or are coming out of the impact of COVID — 19, but there is one economy that is still struggling to survive and not just because of COVID — 19 impact but all the other geopolitical decisions which had a ripple effect. Yes, we are talking about the Sri-Lankan economy.
Sri Lanka’s economy or its GDP is driven by tourism, tea exports, apparel, textile, rice production, and other agriculture products, and apart from that, overseas employment contributes highly to foreign exchange, i.e., many Sri Lankan citizens travel to foreign countries to earn their living and send it back to their family in the form of remittance.
How and Why did it all start?
FISCAL POLICY (TAX CUT)
It all started to pile up towards the crisis in 2019 when the government enacted deep tax cuts in fulfillment of an election promise, and this decision was passed before the pandemic. Prior to these tax cuts, Sri Lanka already had one of the lowest tax revenue-to-GDP ratios in the region. This resulted in a huge dent in the government revenue.
COVID-19 PANDEMIC
Immediately after the tax cut, the world got hit by the COVID — 19 pandemic, which stopped economic activity overnight. Many overseas Sri Lankan workers had to return to their homes, resulting in the country’s foreign remittance decline. The country’s exports like tea, rice, textile, etc., saw a massive plunge as operations were closed due to the pandemic.
Apart from that, the tourism industry suffered a lot globally. Tourism was Sri Lanka’s main GDP contributor, i.e., 12% of GDP is contributed by the tourism industry. It is the 5th largest source of foreign currency in the economy. Still, due to the pandemic, it contributed only 0.8% to the GDP in 2020.
BAN ON FOREIGN CHEMICAL FERTILIZERS
To add salt to the fire, in 2021, the Sri-Lankan govt. banned the use of foreign-made chemical fertilizers in the production of agriculture products, i.e., only local organic fertilizers were available to farmers for their crop, a massive crop failure occurred, and the country at one point of time was an exporter of its agricultural products, now relied heavily on imports to cater to the local demand, and this also resulted in a massive dent on foreign reserves.
RUSSIA-UKRAINE WAR
Globally the COVID restrictions were easing, people started to travel once again, and the Sri Lankan economy was slowly seeing an uptick in their tourism sector, but the war between Russia and Ukraine broke out. Now, how does it affect the Sri Lankan economy? Russia and Ukraine are critical markets for Sri Lanka’s tourism sector. Pre-COVID tourists that visited Sri Lanka were 121,600 in total from Russia and Ukraine, which is 6.3% of total tourist visits in Sri Lanka, but because of war, the tourist visit took a hit from that region.
These series of event, from the tax cut to the Russia-Ukraine war, resulted in high inflation in the economy because of the war, crude oil imports, sunflower oil (Russia and Ukraine is among the major producers), and wheat saw a huge price hike in the international market which resulted in high import bills for the country which is already suffering with low foreign reserves due to pandemic, low remittance, exports dampening and what not.
Current Scenario
Till now, India is the primary source of financial assistance to Sri Lanka, with $4 billion of aid to serve the 22 million people in the Sri Lankan economy.
IMF also has come forward to help the Sri Lankan economy as their team visited Colombo on 30th June to resolve the crisis by discussing economic policies and reforms supported by an IMF Extended Fund Facility (EFF) arrangement.
Everything seemed to fall at the wrong time and place for the Sri Lankan economy. Will they be able to come out of the crisis at all or not? What do you think? Let me know your thoughts on the same.
