Sri Lanka Economic Crisis

Sri Lanka Economic Crisis

Subject: Economy

Section: External sector

Context:

Sri Lanka is going through its worst economic crisis since 1948 when the country gained independence.

Issue?

• Inflation– surged to around 15% in february2022, the prices of essential items such as food, fuel and medicines rose to a record high leading to state led rationing.
• Supply disruption–
  • Daily power cuts of more than seven hours.
  • Cancellation of the school examinations due to shortage of ink and paper.
• The country’s debt to debt-to-GDP ratio was 119 per cent in 2021.

Causes?

• Depletion of forex reserves– A heavily import-dependent nation is left with just $2-billion reserves, leaving Sri Lanka not able to import even essential commodities.
• Diminishing Inflow of Foreign Currency- The pandemic has affected all major sources of foreign exchange earnings like exports, worker remittances, etc.
• The collapse of the tourism industry-contributing nearly 10 percent of its GDP. The pandemic, coupled with the 2019 Easter bombings, led to a fall in the tourism revenues from $7.5 billion in 2019 to $2.8 billion last year.
• Agricultural Distress-blanket ban on chemical fertilisers by the administration last year and adoption of an “organic only” approach crippled the agriculture sector with tea cultivation and its exports, one of the mainstays of the economy, getting affected.
• Ukraine crisis-
  • A significant portion of tourists who travel to Sri Lanka are from Russia and Ukraine.
  • Sri Lanka exports its tea to these two nations and imports almost half of its wheat and sunflower oil from them.

• The war has caused oil prices to spike, exacerbating its forex crisis.

Measures taken?

• Sri Lanka declared an economic emergency to control food supply amid soaring inflation.
  • The emergency provisions allow the government to dictate retail prices for essential food items and seize stocks from traders.
  • The emergency law enables authorities to detain people without warrants, seize property, enter and search any premises, suspend laws and issue orders that cannot be questioned in court.
  • The military will oversee the action which gives power to officials to ensure that essential items are sold at government-guaranteed prices.
• Devaluation of currency-making exports more competitive
• Import curbs to reduce unnecessary outflow of forex reserves
• Partial revocation of fertilizer ban
• Approached the IMF for debt restructuring and a possible bailout.

Impact on India

• Influx of refugee
• Imported inflation and currency depreciation
• Loss of confidence of investors in Asian market- could cause capital outflows