The Srilankan Economic Crisis

The Srilankan Crisis

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The economic situation in Sri Lanka has become the worst since their independence in 1948. Due to high imports and low exports after the civil war the country has always had little foreign currency reserves and heavily depended on its tourism sector to provide for the same.

The Political Crisis

The political crisis between the parliament and the president things got out of hand. This has made Sri Lanka become the first country since the 1970s to stop selling petrol to its citizens and petrol supply was limited to just public transportation.

The Reasons of the Fallout

Failing to address forecasts

When the new government came to power in 2015, they were informed by Institute of Policy Studies of Sri Lanka that the country was going on into an economic crisis.

This was mainly due to the then coalition government that couldn’t move a significant bill in the parliament. The government didn’t focus on the economic situation at that time and instead dealt with political issues like constitutional reforms.

Freebies during election

The ruling governments in the country always used freebies to gain political advantages even when the country was in economically weak situation. These continued heavily after the civil war to integrate the linguistic minorities and gain political advantage.

Reversal of policies

During the year 2018,steps were made to control the economic situation and keep the stability of the economy. This was done under the guidance of the IMF and included policies like automatic fuel pricing, increase VAT rates etc. But these policies however were not widely accepted.

Thus after the election in 2019 the new government reverted on many of these policies.

Foreign Debt Defaults

Srilanka’s external debt is at 119% of its GDP (a figure that was at 42% in 2019.)

The country is due to pay $4 Billion by 2022 with the Srilankan Government only having a reserve of $2.3 Billion. The country has essentially fallen into a debt trap mainly due to its high borrowings from China creating many unutilized projects.

Decreased tourism

The country’s tourism sector represented over one-tenth of the GDP of Sri Lanka.

The sector was negatively affected by the 2019 Easter bombings, and the COVID-19 pandemic prevented recovery.

The Total Tourists arrival fell from 2.17 million to 0.54 million

Tourism earned Sri Lanka $4.4 billion and contributed 5.6% to GDP in 2018, but this dropped to just 0.8% in 2020.

According to the World Bank in April 2021, “Despite the heavy toll of the COVID-19 pandemic on Sri Lanka’s economy and the lives of its people, the economy will recover in 2021, though challenges remain.”

Russia Ukraine War

Russia is one of the biggest export partners of Sri Lanka and the countries tourism industry was also heavily reliant on Russian tourist.

Due to the war both the exports and arrivals from Russia decreased thus putting a halt to the economic recovery.

These factors have resulted in the countries current economic situation and it has led to increased fuel prices, electric shut downs, protests, diplomatic pressure from countries. The nation has also defaulted on its debts and is currently facing deep recession.

There are currently steps being taken by the government and international agencies to help the economy recover. As of now the economic restrictions continue to be in place.

How long will these restrictions continue?

Only Time will tell.

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