Situation in Sri Lanka, the island nation is going through its worst time. The protests are growing the debt bomb, ticking at the center of the storm. Rise for more than 500 rupees per kg milk powder ,800 rupees sugar . Low currency reserves and unprecedented economic crisis has made the situation so bad that army has been sent to manage the distribution of fuel. Exams have been cancelled due to shortage of paper. The government has declared that it is in a state of economic emergency.
Sri Lanka is heavily dependent on imports, but to import basic essentials like food, sugar, lentils, papers, medicine, petrol and diesel the country simply does not have enough funds. At the same time it is also under a massive debt.
The main reasons behind decline of economy includes the 2019 Easter bombings which destroyed Sri Lanka’s tourism industry. Sri Lanka is heavily dependent on its tourism to manage its economic situation. On April 21, 2019 three churches and three luxury hotels in Colombo were attacked in a series of terrorist suicide explosions on Easter Sunday where 270 people died which also included foreign nationals.
Soon after this, the tourism industry was hit badly. According to one report in just one year the tourism declined by 21% .
In December 2019 the government wanted revolutionary reforms which resulted in bad political decision making, the newly elected president of Sri Lanka reduce VAT rates from 15% to 8% in December 2019 which took a massive hit on countries treasury.
Sri Lanka’s income declined even further for the third time in March of 2020 when COVID 19 pandemic struck which completely plunged the tourism driven economy to its worst phase.
If the Easter bombings and tax cuts made the situation bad , COVID made it worst, logged on crippled Sri Lanka’s economy and destroyed whatever was left in tourism industry, the government was forced to spend more to save countries economy and at the same time country’s savings took a deep hit.
Further in 2021 the government wanted the country to shift towards organic farming and to turn the country 100% organic the government took steps towards complete prohibition of chemical fertilizers and pesticides, which led to the further decline in agriculture and resulted in crop failure, especially tea which contributed a significant chunk in the country’s exports. Agricultural output fell and high prices of food items- the inflation hit a new high and the situation got even worse.
All this resulted in a situation where Sri Lanka has acute shortage of Forex reserves, high prices of food items and simply no policy to correct all these measures. At the same time its own currency is depreciating fast in January this year Sri Lanka’s official reserves dropped by 779 million dollars to 2.36 billion from 3.1 billion dollars in December. At the same time it has to pay 4 billion dollars of debt in this year alone.
Sri Lanka has been borrowing since 2007. It owes about 11.8 billion dollars through sovereign bonds it owes 4.6 billion dollars to Asian development bank and over 3 billion dollars to japan and china. Further over dependency on China has also resulted Sri Lanka into heavy losses, the prime example include the Hambantota International Port, Sri Lanka. It was built in November 2010, at the cost of $1.3 billion. With a loan from China. But this port had to suffer huge losses. And Sri Lanka could not repay the debt. That’s why the new government decided that 80% of the stake of the port would be privatised. Sold off to private companies. After the bidding, the company which bought the stakes in the port was a Chinese company named China Merchants Port. After the negotiations, in July 2017, this agreement was finally signed and 70% of the stake was sold to China Merchants Port. Additionally, this port was leased out to this company on a 99-year-lease. In exchange, Sri Lanka received $1.2 billion in foreign currency.
Amid of this situation country is now looking out for help from IMF, which has suggested raising income tax and value added tax to make the situation better. India on the other side has also extended the helping hand in form of 1 billion dollars line of credit to assist keep food and fuel prices stable. In addition India has also approved 400 million dollars of credit swap arrangement with Sri Lanka.