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Partners Universal International Research Journal (PUIRJ)
Volume: 01 Issue: 02 | April-June 2022 www.puirj.com
© 2022, PUIRJ | DOI:10.5281/zenodo.6726553 Page | 9
Sri Lanka's Economic Crisis: A Brief Overview
A.S. Hovan George1, A. Shaji George2, T. Baskar3
1Masters IT Solutions, Chennai, Tamil Nadu, India.
2Director, Masters IT Solutions, Chennai, Tamil Nadu, India.
3Professor, Department of Physics, Shree Sathyam College of Engineering and Technology, Sankari Taluk,
Tamil Nadu, India.
---------------------------------------------***--------------------------------------
Abstract -
Sri Lanka's economic crisis, which
began three years ago, has resulted in great
hardship for the people and has posed the greatest
challenge to the government. Lanka is currently
experiencing an economic and political crisis, which
continues with high inflation and sporadic
demonstrations throughout the country. The
government of Sri Lanka requests citizens abroad to
send home cash 13 Lankan banks have been placed
on rating watch negative Sri Lanka defaults on $51
billion in external debt. Trouble is brewing on the
island paradise. There is no food available. Sri
Lankans have fallen into poverty by at least 500,000
in the last few months. There is no fuel, no
medicines, and critical surgeries are being
cancelled. According to doctors, the economic
crisis may cause more deaths in Sri Lanka than
COVID did. There are daily power outages and
large-scale protests in the streets. The absence of
power and the inability to obtain safe drinking water
has resulted in significant difficulties in the provision
of emergency health services. The safety net
programmes have been interrupted. The situation
in Sri Lanka is much more than just an economic
crisis. Clearly, this is a humanitarian crisis. The
question is, how did it occur, and how did the
government of Lanka lose all of its money? The
purpose of this research paper is to answer these
questions. In addition, the author of the paper
outlines a comprehensive analysis of the issue as
well as the causes of the economic crisis.
Keywords: Economic Crisis, Sri Lanka, COVID-19
Pandemic, High Inflation, Central Bank of Sri Lanka
(CBSL), World bank, Tax cut, Money creation, Sri
Lanka, India.
1. INTRODUCTION
Various factors contribute to the current economic
crisis in Lanka from 2019 to 2022. Such factors
include economic mishandling, a rise in foreign
debt, diminishing foreign reserves as well as a
diminished currency and the rising prices. Apart
from tax reductions, money creation, and national
policy shift towards organic and biological farming,
there were other factors like the Easter bomb
attacks, and the effect of the (COVID-19) virus which
added to the crisis. Coalition government has lost
its majority with March-April 2022, and political
unrest has risen, including their resignation from
ministerial posts. After a fall in output as well as a
shortage of food, switching to organic agriculture
has been reversed. Sri Lanka was set aside for a
sovereign default as the outstanding foreign
exchange reserves would not be enough to meet
the country's external debt obligations in 2022, [1].
The government was required to pay back an
international (sovereign bond) in 2022. A series of
debts are payable back in 2022, including domestic
and foreign debts [2,3]. The Sri Lankan rupee fell to
its lowest in April 2022, as the world's worst-
performing currency, with the US dollar trading in Sri
Lankan rupee [4,5].
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According to a report released by the Sri Lankan
government in April 2022, it has taken steps to
temporarily default on all of its external debt in
order to prevent a hard default.[6,7,8] Sri Lanka's
unblemished record of service of its external debt
has also been broken by the announcement.[9] The
Governor of the (CBSL) insisted that Sri Lanka would
restructure its debt to avoid a hard default.[7]
However, both the ground situation as well as
analyses of government policy measures and world
geopolitical and economic trends, including the
fallout from the Russia-Ukraine conflict, indicate
that there is a situation of uncertainty over the Sri
Lankan economy. In this article, the author will also
discuss the causes, impact, and consequences of
the crisis. As this economic crisis did not occur
overnight, this article seeks to explore how web-
based mass media has covered Sri Lanka's journey
into this crisis over the past few years.
2. METHODOLOGY
The methodology applied is the “Keyword Research
Methodology”. Using keyword research is the most
efficient method of gathering indexed online
content. Thus, this research's goal is to collect
keyword-related content from web services using
the basics of keyword research methodology. First,
Google was used to search for the keyword "Sri
Lanka Economy", "Lanka" Economy and Political
Crisis Sri Lanka" and all articles from January 1, 2010,
to today were filtered. The duplicates and unreliable
sources were removed, and only 45 popular news
items were included in the study. However, since no
winning news has been reported internationally for
the past two years, the cue "Sri Lanka Economy" and
"Lanka" Economy and Political Crisis Sri Lanka" had
only produced negative news. It is also a
noteworthy observation when searching for
information on web content.
3. THERE ARE NUMEROUS EXPLANATION FOR THE
CRISIS IN SRI LANKA
There are many explanations for the Lankan crisis. A
problem exists in the country. Beyond policy, there
are political factors beyond Sri Lanka's control, which
people refer to as fate. It is also believed by the Sri
Lankan population that China is responsible for
many of the problems in Sri Lanka. Let's begin with
the policy. The situation found now is the result of
years of mismanagement. Sri Lanka has a
fundamental issue. Imports exceed exports,
spending exceeds earnings, and the country
experiences a trade deficit. In addition, there is a
budget deficit. There is a double debt. It is an ideal
recipe for disaster. The response of Sri Lanka to this
disaster has been disastrous. Instead of reducing its
deficit, it has increased its debt. A large amount of
money was borrowed by Colombo from foreign
countries and agencies. Currently, Sri Lanka's debt to
GDP ratio is 111%, meaning that it owes more than it
produces. The Asian Development Bank flagged this
issue in 2019. It claimed that the country's national
expenditures exceeded its national income and that
its production of tradeable goods and services was
inadequate.
4. CAUSES OF THE SRI LANKAN CRISIS
4.1 Tax reductions and money creation
In 2019, campaigned for the presidential election. In
accordance with current government election
promises, they intend to cut taxes if they are re-
elected, and ensure that people will pay less taxes.
In this case, how will the country make money? Both
the voters and the present government never
bothered. The result of the election in November
2019, the current government was elected to office
with more than 52% of the vote, and a series of
significant tax cuts followed. Due to Sri Lanka's
current president's policy of large tax cuts,
government revenue and fiscal policies have
suffered, resulting in soaring budget deficits [10,11].
Among these measures were the increased tax-free
thresholds, which decreased the number of
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taxpayers by 33.5%, reducing VAT to 8%, reducing
corporate tax from 28% to 24%, eliminating the Pay
As You Earn (PAYE) tax and imposing the 2% "nation-
building tax" that financed infrastructure
development. Because of the substantial reduction
in tax revenue, rating agencies have downgraded
the sovereign credit rating, making it harder to take
on more debt. The rating agencies expressed
concern. Consequently, Sri Lanka's state coffers will
soon be empty, and the country may soon run out of
funds. Due to this, investors fled Sri Lanka and it
became difficult for the country to access
international markets.
Although the current President was aware of the
revenue loss in 2021, he considered it an "investment"
and does not intend to increase taxes for another
five years [12,13]. For the purpose of covering
government expenditures, the Central Bank began
printing money at a record pace, disregarding the
advice of the International Monetary Fund (IMF) to
cease printing money and instead raise interest
rates and taxes while reducing expenditures [x8].
The IMF cautioned that continuing to print money
will result in the collapse of the economy [14]. CBSL
allegedly printed 119.08 billion rupees on April, 2022,
the highest amount reported on a single day for the
entire year 2022 [15]. In 2022, the total amount of
money added to the financial markets raised to Rs.
432.76 billion [15].
4.2 The external debt of Sri Lanka
Sri Lanka's external debt has doubled from 2010 and
2020. Foreign debt was approximately 42
percentage of its GDP in 2019, however it has gone
up to 119 Percentage of its GDP in 2021 [16,17]. Sri
Lanka expects to repay its debtors US dollars 4
billion towards the end of 2022, while government
reserves amounted to US dollars 2.3 billion as of
April 2022 [18]. Even though commentaries blame
China for a debt crisis, the (ALI)- Australian Lowy
Institute noted that Sri Lanka was not mired in a
Chinese debt trap, due to the fact that external debt
due to China was only around 10 percentage of
total debt in April 2021. The vast majority of Sri
Lanka's foreign debt stock is owed to international
capital markets, which account for 47 percentage. A
further 22 percentage is held by international
development banks, followed by Japan having 10
percentage of Sri Lankan foreign debt [19]. The
President's office announced in January 2022 that it
would request to China to postpone its debt burden
during talks with its foreign minister [20]. As of
March 2022, China has not responded officially [21].
In 2020, Global credit Ratings agency indicated that
Sri Lanka's existing financing sources were
insufficient to cover the country's debt service
requirements, valued at little over US dollar 4.0
billion in 2021[22]. For Sri Lanka to solve its
budgetary problems in repaying its debt, Treasury
auctions must succeed, according to Bellwether. As
soon as this is accomplished, the foreign exchange
problem will be automatically resolved.
Consequence of failed auctions of Treasury bills
filled with printed currency, the government is
sinking further into debt [23]. According to
Bellwether, the debt crisis needs to be resolved, Sri
Lanka would require a reliable fiscal plan as well as
monetary policies, a tax increase to re-pay debt,
and a reduction in interest rates as well as the
opening of imports that would allow tax revenue to
flow back into the government. Increasing interest
rates and curtailing domestic credit are both
effective ways of generating dollars to pay off
foreign debt, however, it is impractical to do so on a
continuous basis for several years. Investors may
be able to regain confidence if their foreign reserves
increase following the repayment of debt, but it will
be a painful process that might or not succeed
given current ideologies[24].
In September, 2021 the government has declared an
economic emergency because of a falling national
currency exchange rate, rising inflation because of
rising food prices, as well as pandemic restrictions
on tourism, which further reduced income. Due to
this, Sri Lanka's foreign reserves dropped to US
dollar 1.9 billion from March 2022, which is
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insufficient to pay foreign-debt obligations of US
dollar 4 billion and an ISB-International Sovereign
Bond payment of US dollar 1 billion for the year 2022
[10]. According to the (NCP)National Consumer
Price Index [25], the (NIR) national inflation rate rose
to 17.5 percentage in Feb 2022. While economic
analysts and experts across the board advised the
government to postpone the payment of its ISBs in
order to preserve foreign reserves, the government
repaid US dollar 500 million in International
Sovereign Bonds that were due in January,
2022[26]. Sri Lanka announced on April,12 2022 that
it will not pay its foreign debt of US dollar 51 billion
[27,28].
4.3The Sri Lankan agriculture crisis
In April 2021 the current government made another
blunder. It has been announced that Sri Lanka will
only permit organic farming, banning all inorganic
fertilizers and agrochemical fertilizers. The
government believes that this will be beneficial to
health. Many critics rolled their eyes. Many realized
that the real issue was insufficient funding, not
health. Sri Lanka was saving foreign reserves by
banning the import of fertilizers. However, this
impacted agriculture production [29]. The drop in
tea production due to the fertilizer ban alone
resulted in losses of millions of dollars. In addition,
the country was forced to import rice due to a 20 per
cent drop in rice production in the first six months
alone. Tea farmers described the situation in the
industry as critical, claiming that organic farming is
ten times more costly and yields half as much as
conventional farming.
Though the proposal was supported by its advisor, it
ignored criticism from the scientific and farming
communities. They warned of a collapse in the
farming sector because of the devaluation of the
national currency, which negatively affected the tea
industry. Consequently, the banning of chemical-
fertilizers and pesticides has caused a serious
economic crisis, since the population expects to
stay without income and no food [30,31]. Amidst
soaring food prices and protests against the plan,
the government abandoned its plan to become the
world's first organic-farming nation in 2021[31].
Although some of the measures were cancelled,
urea imports remain prohibited. There are plans for
Sri Lanka to ration essential goods during peacetime
[32].
4.4The Sri Lankan Tourism Sector
The tourism industry in Sri Lanka was negatively
affected by the Easter bombings of 2019 and the
COVID-19 pandemic that followed[33]. In the event
that borders were closed, tourists completely
ceased to arrive, resulting in a decrease in tourism-
related revenues. Sri Lanka's tourism industry
contributes 13 per cent of the country's GDP. Tourists
are also a source of foreign exchange. In 2020, Sri
Lanka managed to welcome just 173,000 tourists
2018. The number was 2.3 million. You see the gap by
2021, Sri Lanka's tourism revenue was down to USD
2.8 billion. A World Bank report from April 2021 stated
that, despite the negative impact 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. Positive signs of recovery are
already evident. Proper taxation has been
encouraged in order to build self-reliance and avoid
high dependency on foreign debt in the future. The
current social protection initiatives intended to
assist those who are unemployed due to the debt
crisis have been deemed successful. In addition to a
properly structured taxation system, the Sri Lankan
economy would require, according to economists,
an export-driven growth strategy in order to recover
from the current debt crisis, and it was hoped that
the country would achieve a full financial recovery
[34].
4.5Tea exports and tourism have been
affected by the Russian-Ukrainian war
Because of the ongoing tense situation between
Russia and Ukraine due to the Russian-Ukrainian
War, Sri Lanka's economic conditions are already
sluggish [35]. Due to the Russian invasion of Ukraine
in 2022, Sri Lanka has suffered further economic
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hardship, as Russia is the second biggest market for
Sri Lanka's tea exports. Additionally, Sri Lanka's
tourism industry is heavily dependent on these two
nations, as the majority of visitors arrive from either
Russia or Ukraine [36]. As a result, the Ukrainian crisis
has put a halt to economic recovery in Sri Lanka,
which has been adversely affected by both the tea
and tourism sectors[37].
5 IMPACTS OF THE SRI LANKAN CRISIS
Due to the rising price of basic commodities,
shortages of essential goods, as well as rolling
blackouts, the President has been forced to declare
a national emergency. In the last several years, Sri
Lanka has suffered from historically low government
revenues, poorly timed tax cuts, as well as the
Covid-19 outbreak, which has adversely affected the
country's lucrative tourism industry and foreign
remittances. Sri Lanka's government declared the
most severe economic crisis the nation has
experienced in the past seventy-three years. Food
shortages were announced in August 2021. The
government, however, denied that there were
shortages of food. The country's energy minister
admitted that the crisis could result in a financial
catastrophe. At the beginning of April 2022, the new
governor of the (CBSL) was appointed. The ruling
coalition was defeated in parliament when a
majority of 41 parliamentarians left the coalition on 5
April. Curfews were also imposed by the
government after protests became violent.
5.1 Power and fuel Insufficiencies experienced
by Sri Lanka
The economic crisis has led to a decline in
electricity, fuel as well as cooking gas consumption,
due to a shortage of these resources. A financial
minister has instructed all government offices to
turn off all streetlights until the end of March 2022 in
an effort to conserve electricity. The shortage of
cooking gas has forced the closure of nearly 1000
bakeries. Recent months have seen long lines
forming in front of petrol stations. An increase in the
price of crude oil has aggravated the situation
further. The authorities throughout the country have
imposed daily power cuts in order to conserve
energy. To reduce tensions among people waiting in
lines and to simplify fuel distribution, the
government instructed the military to station
soldiers at various gas and fuel filling stations in
March 2022. A total of four individuals were killed due
to fatigue as well as violence during this time. A daily
seven-hour power outage was experienced during
March 2022, which increased to ten hours by the end
of the month and to fifteen hours at the beginning of
April. Because of a shortage of paper and the
escalating price of paper, daily newspapers ceased
printing and began publishing e-papers instead.
Hydroelectricity generation in Sri Lanka has also
been adversely affected.
5.2 Sri Lanka's Inflation
As Sri Lanka encounters an unforeseen economic
crisis, the rising cost of living burns a hole in Sri
Lankans’ pockets. In Sri Lanka, the overall rate of
inflation for February 2022, inflation was 17.5 per cent
[38]. The year on year increase in inflation for food
was 24.7 percent while non-food items saw an 11 per
cent rate[39].
Fig -1: Soaring Inflation (Source: News18 Creative)
The year on year change (Feb 2021 to Feb 2022)
for local red chilis increased by 60 percent, local
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potato's by 74.8 percent and Nadu rice by 64
percent [40].
5.3 The Impact of Sri Lanka's education system
Assume the person has no reason to celebrate after
finding out that exams have been cancelled [41].
The exams, which are part of the continuous
assessment system for students in the country,
have been indefinitely postponed. Many Sri Lankan
schools announced in March 2022 that they would
postpone their term, mid-year examinations for an
indefinite period due to paper shortages in the
entire country, mainly caused by a shortage of
foreign reserves to purchase paper[21,43]. Due to an
insufficient supply of printing paper as well as ink
ribbons, term examinations were scheduled to take
place whole Island on 28 March 2022, however this
date was either completely cancelled or
postponed[44]. Almost 4.5 million students in Sri
Lanka will be affected by the financial crisis [41].
Unfortunately, ongoing power outages have
severely impacted online learning and teaching.
Besides the pandemic, the power crisis has had a
detrimental effect on students physically and
psychologically [42].
5.4 Sri Lanka's medical sector and its impact
Doctors in Sri Lanka have warned that a huge
number of people may die as the country's
healthcare system teeters on the brink of collapse
due to crippling power cuts and a shortage of
essential medications. Due to an insufficient supply
of medicines, all scheduled operations at the (PTH)
Peradeniya Teaching Hospital have been cancelled
[45]. In many other hospitals, routine surgeries have
also been suspended and a significant number of
laboratory diagnostic tests have been reduced. In
addition, there was a shortage of emergency life-
saving drugs in other state-run hospitals [46]. It
was stated by the (MCSL)-Medical Council of Sri
Lanka that there are likely to be a large number of
deaths which will surpass the combined death tolls
from COVID-19, the 2004 tsunami as well as the Civil
War if supplies are not replenished in a short period
of time. [47]. Singapore Red Cross society declared
the Lanka medical crisis an unexpected
humanitarian crisis [48].
As a result, hospitals were running short of
endotracheal tubes to ventilate newborns, infants,
as well as children. Doctors requested that foreign
Lankan communities donate neonatal ETTs of
various sizes [49]. All hospitals in Lanka no longer
have access to imported medical equipment or
essential drugs, according to the (SLMA)-Sri Lanka
Medical Association [50]. The hospitals were
pressed to the point that they sterilized and re-used
endotracheal tubes to provide oxygen to newborns'
lungs. Due to the shortage of new medical
equipment, doctors have been compelled to reuse
old and already used equipment to treat patients.
The light from mobile phones has also been
reported to have been used by doctors to perform
medical procedures [51]. Because of rolling power
cuts, rural doctors have also been compelled to
stitch injuries in the darkness. There are also reports
that there are short supplies of emergency
medications for the treatment of heart attacks[52].
5.5 The tourism sector and its impact
Besides the remittances of its workers, Sri Lanka's
tourism industry is the third-largest source of
foreign exchange for the country. Additionally, this
industry is a large employer and a significant
contributor to foreign revenue for the government.
As a result of the worst financial crisis the country
has ever faced, the tourism industry has been badly
affected. The United Kingdom, Canada, and India
cautioned their citizens to pay attention to the
ongoing economic instability in Lanka [53]. Some
countries in Europe and Canada urged their citizens
to keep water, food, and fuel on hand in case of
long-term disruptions, to ensure that adequate
supplies of medicines are on hand because they
may not be readily available, and to monitor local
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media for the most recent updates. After Russia
and India, the UK is Lanka's third-largest contributor
of inbound tourists. Sri Lanka's tourism industry
contributes approximately 5 per cent of the
country's GDP. The major markets are India, UK, and
China. As a result of the economic crisis, the tourism
sector was severely affected.
5.6 Impacts on the export sector
Due to the current economic situation in Sri Lanka,
leading textile companies, including Zara, Mango,
and H&M, have shifted their attention from Lanka to
Asian countries, including India, Bangladesh,
Cambodia, and Vietnam, where they have placed
their orders [54]. India has experienced a rapid
increase in export orders for its textiles and tea after
the economic and political conditions in Sri Lanka
deteriorated. As a result, India's export market has
greatly increased [54]. As export demand has
diverted from Lanka to India due to the economic
and political crisis in the island nation, the textile
capital of Tirupur, Tamil Nadu and the tea gardens
in Assam and southern India are seeing an increase
in orders from overseas. The main exports from Sri
Lanka are garments and tea. Sri Lanka exports USD
5.42 billion worth of garments each year to the
global market. Because of the ongoing crisis, global
brands have relocated some of their orders from Sri
Lanka to India. Sri Lanka's export sector has been
severely impacted.
5.7 The impact of the economic crisis on
entertainment and sports
Due to the dollar crisis and the economic crisis in Sri
Lanka, SLT PEO TV, Sri Lanka's largest internet
protocol television service provider, has temporarily
halted and suspended transmission of foreign
channels [55]. In addition, the Indian Premier
League 2022, was also suspended midway due to
inability to pay the host broadcaster, Star Sports
[56]. In addition to the plummeting dollar reserves,
many sports associations in Sri Lanka have been
unable to send their teams to international sporting
events, especially since upcoming multi-sporting
events such as the Asian Games and
Commonwealth Games are just around the
corner[57]. The economic crisis is expected to have
an increasingly detrimental impact on the
entertainment industry, along with other media
services.
6. CONCLUSIONS
The government of Lanka should take steps for the
economic recovery of the whole country once the
scarcity of certain basic commodities comes to an
end. The government must also cooperate with
Tamil political leadership to establish a roadmap
for economic growth in the civil war-impacted
eastern and northern regions, between areas
severely struck by the ongoing crisis. It would be
better to increase domestic tax revenues and
reduce government spending to restrict borrowing,
especially sovereign borrowing from foreign
sources. Strict measures must be taken for
restructuring the administration of grants and
subsidies. India’s Aid: It would be entirely
inappropriate for India to allow the Chinese to take
control over the growing portions of Sri Lankan land.
India should offer Sri Lanka financial assistance,
policy recommendations and investment from
Indian entrepreneurs. Indian companies must build
supply chains which connect the Indian as well as
Sri Lankan economies with goods and services
including the export of tea to Information
technology services. India, instead of any other
country, must help guide Sri Lanka on the path to
achieving its potential to reaping the benefits of a
stable neighbourhood. The Lankan authorities must
ensure that the current crisis will not be used to
intensify smuggling activities as well as trafficking
or stir up emotions in the country. Crisis as an
Opportunity: Both Sri Lanka and India cannot have
strained relations. As a much larger country, the
responsibility is on India. It must be very patient and
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engage Sri Lanka even further periodically and
closely. Further, it is important to enhance people-
centric development activities while carefully
staying away from any interference in Lanka's
internal affairs. As a consequence of the economic
crisis, Sri Lanka is keen to put in place major
financial and regulatory reform measures. These
reforms will reduce the chances of a future crisis
and will mitigate the impact of whatever crisis will
occur and is deserving of people's full support [58].
Sri Lanka's government should take the above-
mentioned steps for the economic recovery of the
whole country. It hopes the foreign exchange
situation will improve early with the realization of
the planned inflows from bilateral partners, and
debtless creating foreign exchange inflows in the
future. It is anticipated foreign exchange revenues
from the tourism industry and remittances will be
improved in the near future. It is expected that the
people of Lanka will feel economic relief in the
foreseeable future [58].
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