The Sri Lankan Economic Crisis Causes and Consequences

Introduction

Sri Lanka is now experiencing a severe economic and political crisis that recently resulted in a default on debt obligations. There are several causes for this crisis, and the economic unrest has spawned widespread unrest and bloodshed. This diagram explains some contributing factors to Sri Lanka’s present predicament.

The problem is supposed to have started as a result of several interrelated, compounding circumstances, including the invention of money, a national policy to transition to organic or biological farming, the Easter bombings in 2019, and the COVID-19 pandemic’s effects. The consequent economic woes led to the demonstrations in Sri Lanka in 2022.

Details About Sri-Lankan Economic Crisis

Location Of Crisis Sri-Lanka
Current StatusOngoing
Caused ByCovid-19, 2019 Sri-Lankan Easter Bombings 
Date 2019 April — ongoing.

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A Chronology Of Tragedies

The Sri Lankan Economic Crisis Causes and Consequences
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After years of poor economic management, Sri Lanka’s persisting issues have surfaced. An overview of recent events is given in the following timeline.

2019: Unanticipated income tax breaks resulted in substantial losses in tax revenue, draining a country that was already strapped for cash.

2020: One of Sri Lanka’s most valuable sectors was disabled when the COVID-19 epidemic struck, closing borders worldwide. Before the pandemic, tourism accounted for approximately 5% of the nation’s GDP and supported more than 388,000 employment. However, with almost 40,000 jobs gone by 2020, tourism’s GDP contribution has decreased to 0.8%.

2021: The Sri Lankan government recently outlawed chemical fertilizers manufactured outside. The embargo was implemented to stop the nation’s foreign exchange reserves from depleting. However, because farmers could only obtain local organic fertilizers, a significant crop failure occurred, causing Sri Lankans to rely even more heavily on foreign and drastically decreasing stockpiles.

  • April 2022: At the beginning of April of this year, large-scale protests calling for the impeachment of President Gotabaya Rajapaksa began in Colombo, the capital of Sri Lanka. The Sri Lankan government declared its default in April 2022, making it the country’s first since gaining independence in 1948. It was also the first sovereign default in the Asia-Pacific region in the twenty-first century.
  • May 2022: Pro-government supporters assaulted protestors viciously in May. Then, Mahinda Rajapaksa, the brother of President Rajapaksa and a previous prime minister, resigned and was replaced by Ranil Wickremesinghe.
  • June 2022: As food costs continue to rise, the government just allowed a four-day work week to provide individuals one additional day to cultivate their food. Food costs increased by more than 57 percent in May. The crisis in Ukraine’s impact on grain prices, as well as the global rise in fuel prices, have exacerbated Sri Lanka’s already terrible condition.

Rising Prices In Cost Of Living Due To Crisis

The cost of essential products has significantly increased. The rate of inflation has surpassed 50%. Additionally, there have been several power outages. The health system is on the point of disintegrating due to a shortage of medications. According to officials, there isn’t enough gasoline in the nation to provide critical services like buses, trains, and medical vehicles, and there isn’t enough foreign cash to import more, either.

The cost start of the year has decreased of gasoline and diesel has increased significantly due to the scarcity of fuel. For two weeks in late June, the government outlawed selling gasoline and diesel for non-essential cars. According to speculation, it is the first nation to do so since the 1970s. Fuel sales are still severely constrained. To conserve resources, people have been advised to work from home, and schools have been closed.

The Sri Lankan Economic Crisis Causes and Consequences

Sri Lanka’s Economic Turmoil is impacting Indian Firms.

The crisis spillover has even reached Indian coastlines. ITC claims that its first international hotel business has failed. Before the epidemic, building on the $300 million projects in Colombo was hampered by the 2019 terror attacks. A daily financial report in April that due to Sri Lanka’s unstable foreign exchange reserves and fuel shortages, automakers including Tata Motors, Mahindra & Mahindra, Ashok Leyland, and TVS Motors had stopped exporting vehicle kits to the country and halted production at their assembly plants there. Instability in Sri Lanka might impact Indian Oil, Airtel, Taj Hotels, Dabur, Ashok Leyland, Tata Communications, Asian Paints, and State Bank of India, according to an India Briefing report by Dezan Shira & Associates.

For India, Sri Lanka has been a crucial strategic ally. So even while some of our enterprises are affected, and others strive to fill the hole left by the crisis in Sri Lanka, India’s support in this hour of need will only strengthen ties with the island country, which has always had a strong Chinese influence.

Possible Crisis Resolution Plan

The G7, which consists of the US, Canada, France, Germany, Italy, Japan, and the UK, has stated that it supports Sri Lanka’s efforts to lower its debt repayment obligations.

India has contributed at least $1.9 billion, while the World Bank has agreed to give Sri Lanka $600 million. The Sri Lankan government has also discussed a potential $3 billion (£2.5 billion) loan with the International Monetary Fund (IMF).

According to the IMF, the government would have to hike interest rates and taxes as a condition of any settlement, which collaborates with its 190 member countries to stabilize the global economy. In addition, Sri Lankan Airlines, a state-owned carrier, could be privatized. To assist the price of gasoline, the nation has urged Russia and Qatar to supply it with oil at affordable costs.

Conclusion

President Rajapaksa has designated Prime Minister Ranil Wickremesinghe to serve in that capacity. While he works to stabilize the situation, Mr. Wickremesinghe has proclaimed a state of emergency over the whole nation and enforced a curfew in the western region. In Sri Lanka, things have drastically altered. President Rajapaksa and Prime Minister Wickremesinghe have acceded to the protesters’ original demand that they both quit. This follows the president leaving the nation when demonstrators stormed his palace.

What is causing Sri Lanka’s current crisis?

The problem is supposed to have started as a result of several interrelated, compounding circumstances, including the invention of money, a national policy to transition to organic or biological farming, the Easter bombings in 2019, and the COVID-19 pandemic’s effects.

What is Sri Lanka’s economy like right now?

From 9.6 percent of GDP in 2019 to 11.1 percent and 12.2 percent of GDP in 2020 and 2021, the budget deficits increased dramatically.

How much is the world owed by Sri Lanka?

Sri Lanka paid in servicing its foreign debt $7 billion.

Is Sri Lanka a developing nation?

In Sri Lanka, 11.7% of people live on less than $3.20 daily.

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