Sri Lankan Economic Crisis
The Sri Lanka economic crisis has been in the news for the past few weeks. The country has defaulted on its foreign debt for the first time since its independence & the Sri Lankan people are facing long power outages and extreme scarcity of basic commodities like food grains, fuel, medicines & other essential items. This has led to a rise in inflation, which is at an all-time high of 17.5%.
The Chinese Debt Trap?
Many people tend to believe that the main driver behind the economic crisis is the loans obtained from China. However, the loans from China only account for about 10% of Sri Lanka’s external debt. In fact, loans from Japan actually account for a higher share, at 11%
China’s infrastructural loans including the financing of the Hambantota port are also cited as the reasons for the crisis. But since the port was running into losses, Sri Lanka leased it out for 99 years to the Chinese Merchant’s group for $1.2 billion, which actually helped to bolster Sri Lanka’s foreign exchange reserves.
So, what are the real factors behind the crisis?
Shortage of Foreign Exchange:
The agriculture sector in Sri Lanka is dependent on export-oriented crops like tea, coffee & Rubber. The foreign exchange earned through exporting these crops accounts for a large chunk of the country’s GDP. Over the years, the country has also been dependent on tourism, foreign Remittance (Money sent into Sri Lanka from other countries, by people working abroad) & exporting garments.
But when the covid 19 pandemic struck the country in Mar 2020, there was a drastic fall in the number of tourists arriving in the country, due to international travel bans. Also, there was a significant reduction in exports mainly due to the disrupted global supply chain because of the pandemic. This led to a significant reduction in the country’s foreign exchange reserves.
Struggling to pay for Imports:
The country is import-dependent for everyday basic commodities like fuel, food items & medicine, but a shortage of foreign exchange reserves in the country means that the country is unable to import these basic items & which has led to a surge in the prices. A kilogram of rice which should have cost around 100-150 Sri Lankan Rupees in 2021, now costs around 500 Sri Lankan Rupees.
Ban on Fertilizers:
In April 2021, the Rajapaksha-led Government made the fatal mistake of completely banning the import of fertilizers. The nation decided that it will become a 100% organic farming nation. This policy turned out to be a failure as it led to a fall in agricultural productivity and eventually lower export income. The policy was withdrawn in November 2021, but the damage was already done.
What lies ahead?
Right now, the neighboring countries are all trying their best to help Sri Lanka. The country is in a dire need of dollars to import food, fuel & other essential items. India has extended a $1 billion line of credit and is also making a $400 Million currency swap agreement to bolster the Sri Lankan foreign reserves. But this won’t enough as the country is drowning in debt and what it really needs is a Bailout from the International Monetary Fund.
How Chinese Debt Trap is linked with Srilankan Economic Crisis?
China’s infrastructural loans including the financing of the Hambantota port are also cited as the reasons for the crisis. But since the port was running into losses, Sri Lanka leased it out for 99 years to the Chinese Merchant’s group for $1.2 billion, which actually helped to bolster Sri Lanka’s foreign exchange reserves.
Real Factors behind Srilankan Economic Crisis
1. Shortage of Foreign Exchange
2. Struggling to pay for Import
3. Ban on Fertilizers
Also, Read: Shortage in Newsprint in India
Reference: News UN
