Sri Lanka is in dire situation

Everyone is talking about the repo rate hike or the Russia-Ukraine war. Still, no one discusses the burning issue under the blanket, i.e., the Sri Lankan economic and political crisis.

Yes, the whole of Sri Lanka Island is in a dire situation. But How and why did the crisis happen in the first place?

In November 2019, the Sri Lanka govt. announced tax cuts as promised by President Rajapaksa’s election pledges with the motive to stimulate economic activity and strengthen the country’s development, but little did anyone know that it was a step towards the crisis.

After the tax cut, the world got hit by the COVID-19 pandemic, which only exacerbated the situation for the Sri Lankan govt. as tourism came to a standstill, exports were halted, people lost their jobs, etc. One of the major sources of income for Sri Lanka was tourism inflows, and foreign remittances took a massive plunge. According to official reports, Sri Lanka’s foreign reserves dropped from a healthy level of $ 8,864 million in June 2019 to $ 2,361 million in January 2022. These reserves were not enough to cater to external debt taken from China to fund the ambitious infrastructure projects. 

To make the matter worse for the economy, Rajapaksa in 2021 shifted to organic farming with a ban on chemical fertilisers, triggered farmer protests, and saw the production of critical tea and rice crops decline. 

Globally, supply chain disruptions and the Russia-Ukraine war have only put petrol on the fire, i.e., resulted in crude prices touching triple-digit in the global market with a ripple effect on food prices at the same time. It has resulted in the depletion of foreign reserves for the country with nil or at least foreign reserve inflows. 

What is the solution?

Currently, external help in terms of credit facility or bridge financing from neighbouring or friendly countries, restructuring current debt, or negotiating a program with the IMF are available alternatives. But this can help only when some trusted party can back this credit, and at a national level, govt. It is considered a trusted party, but Sri Lanka’s PM resigned from the position, worsening the matter.  

So, It seems Sri Lankan’s situation will stick around with us for a while; we don’t know if the matter will get worse or will it change the trajectory. Time will only tell us what will happen.

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