Crisis in Sri Lanka

In News

• Sri Lanka’s Prime Minister Mahinda Rajapaksa quits amid the island nation’s worst economic crisis.

About

• The Prime Minister of the island nation gave his resignation recently as the protests mounted pressure on him in the wake of the worst economic crisis the island nation has seen since independence.
• Sri Lanka currently is facing an economic crisis where its economy is running low on forex reserves and thus is not able to pay for essential import bills such as fuel, food items and other essential goods.

Why the Crisis?

• Long run historical imbalance: 
  • In a run up to 2019 elections, Mahendra Rajapaksa announced deep tax cuts in his manifesto which led to a steep fall in revenues. 
  • This severely impacted Sri Lanka’s capacity to service the import bills which ultimately led to plummeting of forex reserves by 70 percent.
• Huge infrastructural debt: 
  • Sri Lanka tried emulating the China led model of growth and development by rapidly developing the infrastructure for which it took huge long gestation loans without analysing the financial, ecological viability of the projects. 
  • This has led to a vicious cycle of debt and its interest payments.
• Dwindling tourism sector:
  • Sri Lanka primarily is a tourism led economy. The Easter bombing in 2019 led to sharp downfall in tourists’ arrival which got further aggravated due to covid crisis thus leading to huge unemployment and revenue loss.
• Misguided policies of the authoritative regime:
  • In 2021, the Sri Lankan government declared that it would be opting for 100 percent organic farming thus wiping out conventional farming, deploying chemical fertilisers and HYV seeds at once.
  • This led to sharp decline in grain production which compelled the government to import food items thus further aggravating the debt and balance of payment problem.
  • Therefore, the President declared an economic emergency to contain rising food prices, a depreciating currency, and rapidly depleting forex reserves.
• Impact of covid:
  • Covid further exacerbated the already fragile economic condition in Sri Lanka. 
  • Exports of tea, rubber further took a sharp dip and the tourism sector with various backward and forward linkages came to halt. 
• Remittances also dropped significantly.
  • Government expenditure rose while revenue took a hit. 
  • This has led to a drop in sovereignty rating which means Sri Lanka will face problems while seeking loans from multilateral institutions and inflow of foreign investment will be hampered in near future.

What lies ahead?

• The resignation of the incumbent PM gives way to the president to put opposition members in key government roles.
• However, the protestors are demanding the resignation of the President as well.
• Resignation of the PM will also dissolve the cabinet, raising questions about who would lead Sri Lanka’s ongoing talks with the IMF for aid to buy food and fuel.
• Rising prices of everything from fuel to essential goods have kept the protests on in Sri Lanka and its inching towards sovereign default.
• Sri Lankan authorities have imposed a nationwide curfew and Army troops were deployed in Colombo.
• Protestors are demanding the government to form an interim administration to overcome the worst economic crisis.

Source: TH