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Emergency in Sri Lanka

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April 04, 2022

What is the issue?

President Gotabaya Rajapaksa declared a state of Emergency in Sri Lanka after the public resentment due to a sharp economic downturn.

What triggered the crisis in Sri Lanka?

  • War time effects- During the period of the war, budget deficits were high.
  • The capital flight that accompanied the global financial crisis of 2008 drained Sri Lanka’s foreign exchange reserves.
  • The IMF loan in 2009 was obtained with the conditionality that budget deficits would be reduced to 5% of the GDP by 2011.
  • Post war growth- Sri Lanka’s post-war GDP growth was reasonably high at 8-9% per annum between 2009 and 2012.
  • The economy was on a downward spiral after 2013 as global commodity prices fell, exports slowed down and imports rose.
  • The government approached the IMF in 2016 for another 1.5 billion dollar loan with conditionality for a three-year period between 2016 and 2019.
  • The IMF package led to a deterioration of Sri Lanka’s economic health where GDP growth rates shrank to 2.9% in 2019.
  • Investment rate and savings rate fell, government revenues shrank and government debts rose.
  • New shocks
    • The Easter Sunday bombings of 2019 deterred tourists
    • The pandemic since early 2020 drained the economy
    • The government’s tax revenue was cut substantially
    • The “organic only” agricultural policy (chemical fertiliser ban has been rolled back) impacted the food security
  • The current Sri Lankan economic crisis, then, is the product of
    • the historical imbalances in the economic structure
    • the IMF’s loan-related conditionalities
    • misguided policies of authoritarian rulers and
    • the official embrace of pseudo-science

What were the economic indicators?

  • Fall in key foreign revenue earning sectors
  • Fall in earnings from tourism, exports, and worker remittances
  • Rise in imports
  • A glaring trade deficit
  • Balance of Payments problem
  • Huge foreign loan obligations
  • Drop in domestic production

How did the crisis manifest itself on the ground?

  • The long-simmering crisis came into limelight during 2021 food emergency, when supplies were badly affected.
  • It was soon followed by fears of a sovereign default in late 2021, which Sri Lanka prevented.
  • The island continued facing severe shortage of essentials from fuel, cooking gas, and staple food grains to medicines.
  • The fuel shortage has led to long blackouts (upto 13 hours) across the island.
  • The value of the Sri Lankan rupee has dropped to 300 against a U.S. dollar putting importers in a difficult spot.
  • The COVID-induced salary cuts and job losses and the rising living costs have brought more agony.
  • Batches of Sri Lankan Tamils arrived on the Rameswaram coast trying to escape a dire situation in Sri Lanka posing a risk for refugee crisis.
  • Sri Lankans are in anger, going by public demonstrations and protests and want the President to step down immediately.

Has the government sought help?

  • India has extended 2.4 billion dollars this year to help the country reel out from the crisis.
  • China is considering a fresh request from Colombo for 2.5 billion dollars assistance, in addition to the 2.8 billion dollars it has extended since the pandemic broke out.
  • The government has decided to negotiate an International Monetary Fund programme, while seeking support from other multilateral and bilateral sources.

 

References

  1. https://www.thehindu.com/news/international/explained-why-is-sri-lanka-under-a-state-of-emergency/article65284410.ece?homepage=true
  2. https://www.thehindu.com/opinion/op-ed/explaining-sri-lankas-economic-crisis/article65275579.ece

 

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