What’s happening in Sri Lanka? All you need to know about its economic crisis

What’s happening in Sri Lanka? All you need to know about its economic crisis

Battered by the worst economic crisis in its history, the island nation is struggling to pay for essential imports after its foreign exchange reserves saw a 70 per cent drop in two years.

Sri Lanka's economic crisis Sri Lanka's economic crisis

Sri Lanka, whose economy is in the doldrums, has sought an additional credit line of $1.5 billion from India to import essentials. This is on top of the $1 billion support that was extended by India to help pay for critical imports. 

The country is struggling to pay for essential imports after its foreign exchange reserves saw a 70 per cent drop in two years. Short supply of fuel, skyrocketing food prices, daily power cuts have fuelled protests against the Sri Lankan government. 

International rating agencies have downgraded the country’s credit ratings, with many experts believing that it will not be able to service its $51 billion sovereign debt this year.

What happened to Sri Lankan economy

COVID-19 pandemic that affected the tourism sector, ill-timed tax cuts, weak government finances and skyrocketing inflation, impacting foreign remittances are some of the main factors behind Sri Lanka's present economic crisis.

Sri Lanka’s foreign currency reserves nosedived 70 per cent since January 2020 to around $2.3 billion by February, which is a fall of $779 million from December 2021. It faces debt payments of $4 billion in the rest of this year, one of which is of $1 billion in the form of sovereign bond that matures in July. Its reserves are enough to only pay for about a month’s worth of imports, indicating a fall in essential commodities such as fuel, food and medicines. 

Electricity generation has been impacted with only four hours of power a day. Printing industry has also taken a hit, driving publications to cut down on production, to even outright closure, and postponement of school examination.  

This did not happen overnight. This was a long time in the making. The Sri Lankan economy had sustained structural problems for several years. Its foreign exchange reserve increased due to borrowing of foreign currencies and not because of export of goods and services.

In 2019, the Sri Lankan government announced tax cuts, lowering the country’s revenue. During his presidential campaign, President Gotabaya Rajapaksa promised to cut 15 per cent value-added tax by nearly half as well as abolish other taxes to boost consumption and growth. 

Moreover, the Chinese loans of over $5 billion it banked on, were mostly for low-return projects such as construction of ports, airport and coal power plants.

On top of that the tourism sector, which is one of the big earners for the country, crumbled during the COVID-19 pandemic. Its foreign remittances nosedived. But even before, the sector took a hit during the Easter bombing in 2017. And before it could recover, COVID-19 hit it hard. 

Russia and Ukraine tourists amounted to 25 per cent of the inflow till mid-February. The war and the subsequent sanctions on Russia also had its impact on the country. Tourism from India, China, the UK, and Germany has also not recovered. 

How is India helping

New Delhi has indicated it would meet the request for the new credit line, to be used for importing essential items such as rice, wheat flour, pulses, sugar and medicines. In addition to the credit lines, India this year extended a $400-million currency swap and a $500-million credit line for fuel purchases to Sri Lanka.

Subrahmanyam Jaishankar, Minister of External Affairs, responded to the suspension of scheduled surgeries and shortage of medicines in Sri Lanka and said that India is contacting the commissioner to extend help.

"Disturbed to see this news. Am asking High Commissioner Baglay to contact and discuss how India can help @IndiainSL," Jaishankar tweeted.

(With inputs from Prabhash K Dutta, agencies)

Also read: India, Sri Lanka to intensify energy and maritime cooperation: EAM S Jaishankar

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Published on: Mar 29, 2022, 2:51 PM IST
Posted by: anwesha madhukalya, Mar 29, 2022, 2:40 PM IST