Sri Lanka, the island nation facing the worst economic crisis under Rajapaksa’s government. It forced the residents to protest against the government, as they are facing shortage of food, fuel, essential commodities and power cuts upto 13 hours. On the other hand, Sri. Lankan government is facing a shortage of foreign currency which ties the government’s hand on importing essential commodities and fuel.

Do you think only COVID-19 is responsible for Sri Lanka’s economic crisis? If yes, then you are wrong.

Let’s discuss the factors responsible for the economic crisis…

Before discussing the factors, understand how it actually started. Former PM Ranil Wickremensinghe said “When his government was in power from 2015-19, Sri Lanka’s foreign reserve fell from $7 million to $4 million. The country has to repay around $3 billion with no plan on how to pay for these”. During the tenure of Mahinda Rajapaksa (2005 – 2015), the government took loans to stabilize the crisis, and unfortunately the next government has to bear this loan. After that also, the government didn’t take any initiative for the development of the country and the people due to which they won’t be able to repay the debts and stabilize the economic  status. Now, so many factors piled up which lead to a huge economic crisis in Sri Lanka.

1.        China’s Debt-trap Policy:

One of the reason of economic crisis in the country is a huge debt-trap in China’s diplomacy. According to CNBCTV18 report, in 2021, Sri Lanka accrued a foreign debt of $35 billion, out of which nearly 10% foreign debt is of China in the form of concessionary loans to Sri Lanka.

Sri Lanka government gave their two major ports i.e; Hambantota Port and Colombo Port City to China on the lease of 99 years. Not only this, China has around 50 infrastructure projects in Sri Lanka which is not so profitable for Sri Lankan’s.

At present, the reckless borrowing of loans by Rajapaksa’s government made the situation inevitable for Sri Lanka. When the government tried to get some concessions on the loans, China perpetually refused to offer concessions on debt repayment.

China’s debt trap diplomacy is growing faster in other Asian countries also. Sri Lanka’s economic crisis is the lesson for other countries.

2.       Poor Agriculture Policy:

Sri Lankan’s are facing scarcity of food because of poor agricultural policy adopted by the government. In April’21, government took a decision to ban the import of chemicals and push the country into organic farming. Due to the ban on imports, the cultivation of grains falls as much as 43% in November’21, reuters report said. As per the IMF report of March ’22, the agricultural production is worse than expected.

Sri Lanka wants to become a world 1st organic farming nation. But, the government’s poor agricultural policy is one of the major factors for the downside of the economy. Later in November’21, the government revoked his decision, but it was too late for Sri Lanka.

3.       Bad Tax Policy:

In the year 2019, the government made bad decisions in two major sectors i.e; agriculture and finance. In December’19, the government introduced tax reforms such as reduction in the Value-added-tax (VAT) from 15% to 8%, exemption in Income Tax of persons and increase in income threshold.

Rajapaksa’s bad tax policy led to the share of government revenue in GDP falling from 12.66% in 2019 to 9.17% in 2020.

4.       Fall in Tourism :

Sri. Lanka’s major source of income is tourism which falls down after easter bombing in 2019. Sri Lanka faced a fall in tourism in 2019 and after that pandemic (Covid-19) hit hard the tourism of Sri Lanka. Over 10% of country’s GDP is dependent on tourism industry and the fall in tourism brings down the foreign exchange, which leads drop in forex reserves from $7.5 billion in 2019 to around $2.8 billion in July’21.

These factors are responsible for high inflation in Sri Lanka. As per the data of Central bank of Sri Lanka, the Nation Consumer Price Index (NCPI) soared upto 12.90 in Jan’22 from 4.20 in Jan’21. On 24th April’22, the US Dollar exchange rate was 335.91 dollar. The Sri Lankan currency depreciated rapidly and the projected GDP growth rate fell from 3.3% in Oct’21 to 2.6% in Mar’22.

With no help from China on concession in debt loan, India is helping Sri Lanka to overcome its economic crisis by providing support of 2.5 bn USD, credit for fuel, food and energy sector and support for currency-currency swap. India is ready to help Sri Lanka on humanitarian grounds and in the country’s interest. This decision not only helps Sri Lanka, but also helps India in broadening its security and lessening the effect of China on Sri Lanka. 

By Hemlata

As a news author, Hemlata understands the responsibility of her role in shaping public discourse and maintaining the public's trust. She is committed to upholding the highest ethical standards in journalism, ensuring accuracy, fairness, and transparency in her reporting.

4 thoughts on “<strong>Why Sri Lanka is facing huge economic crisis?</strong>”
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