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Empirical Economics Letters, 22 (2): (August 2023) ISSN 1681 8997
SRI LANKAS ECONOMIC CRISIS: REVIEW BAD TO WORSE
Authors
Dr. Satish Athawale1
Assistant Professor
H K Institute of Management Studies & Research Mumbai, Maharashtra, India.
E-mail of the corresponding author: satishathawale@gmail.com
ORCID ID: 0009-0005-0821-1982
Dr. Satish Dhoke2
Assistant Professor,
Department of Commerce, Moreshwar Arts Science and Commerce College,
Bhokardan, Dist-Jalna, Maharashtra, India.
E-mail of the corresponding author: satishdhokecommerce@gmail.com
ORCID ID: 0000-003-0347-428X
Md Mohsin Khan3
Assistant Professor
Department of Economics
Central University of Karnataka, India.
E-mail of the corresponding author: mdmohsinkhan40@gmail.com
ORCID ID: 0009-007-8891-8412
Mohammed Yunus 4
Research Scholar
Department of Commerce
Central University of Karnataka, India.
E-mail of the corresponding author: yunusbpd123@gmail.com
Abstract:
Sri Lanka is currently experiencing a socioeconomic and political crisis and
successive failure of government on many fronts leads to this financial crisis but actual
indicators for the failure have already been shown in many ways in Sri Lanka. As the
inflation rate reached up to 18 per cent this could be an alarm signal for the government to act
so it will relieve the common man. Sri Lanka defaults $51 billion in external debt. There is no
food available and commodity prices are very high so it could not possible to purchase. Sri
Lanka has fallen into poverty. 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 is a number of protection on street. The people of Sri Lanka
struggling to get basic amenities. The absence of power resulted in many problems and
religious fights among the citizens. Many emergency services have been suspended due to
power failure. Items like milk, medical, emergency services and others have been affected.
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Plan and policy have been drastically changed. The situation in Sri Lanka is much more than
just an economic crisis. Now, this is a humanitarian crisis. Sri Lanka still has a long way to
go to come out of this crisis, which has been a long time in the making. Decades of fiscal
deficits, current account deficits, a bloated public sector, diminishing tax revenue, and
subsidized prices have led to this state. Currently, the country is looking at an IMF bailout,
for which it needs to restructure its debt. Debt restructuring can be complicated, especially in
China, which prefers to refinance loans instead of restructuring approaches. With this paper,
researchers want to understand the basic aspect behind the crisis. Understand the loopholes
that make a failure of the Sri Lankan economy, and how the allocation of money has been
done by the government. How does it happen? The purpose of the research paper is to answer
the basic question of this financial crisis.
Key Words: Financial Crisis, Emergency Services, Bailout, Fiscal Deficits.
1. INTRODUCTION
Over the years, the Presidential Palace has been one of Sri Lanka's grandest and most
heavily guarded buildings, serving as the residence of the President of Sri Lanka. But that all
changed in July 2022 when protesters flooded in to take control and demand the president's
resignation before toppling the palace. "This was the home of the most powerful man in Sri
Lanka.’ It was never open to the public because it was very heavily guarded'.
(https://edition.cnn.com, srilankas crisis, 2022)
(Report, 2011) Sri Lankan government troops were responsible for abuses common
people by way of atrocity on their civilian. A number of credible sources have estimated there
could have been as many as 40,000 civilian deaths reported during decades." (Satkunanathan,
2022) Sri Lanka's next long-term leader must "tackle entrenched problems like ethnic
conflict, disparity, accountability for human rights violations, as well as possess the
commitment and integrity to rebuild public trust." "Because we simply can't afford to slip
back yet again into a crisis like the one we face today in Srilanka."
“The urgent priority is a peaceful transition of power that respects rights and
addresses the root causes of the political and economic crises, ultimately ending with a lack
of accountability, corruption, and control of power. “If a more stable government is not
formed in the allotted time, there is a risk of humanitarian crises and an increased likelihood
of violence and repression, attacks, and emergencies. (https://edition.cnn.com, sri lanka crisis,
2022)
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The crisis has long been in the making; successive governments have failed to enact
policies that insert Sri Lanka into the global supply chain, instead opting for protectionist
measures. This has exacerbated the “twin deficit” problem in which Sri Lanka faces both a
budget deficit and a current account deficit (https://edition.cnn.com, srilankas crisis, 2022).
(IMF, 2020) Sri Lanka’s debt obligations have expanded as politicians invest in
infrastructure projects, including a number of commercially enviable vanity projects. Sri
Lanka has risen this funding from both international investors, who account for about 37
percent of the country’s overall debt profile, and bilateral creditors such as China and Japan.
(IMF, 2020) China is Sri Lanka’s largest bilateral creditor, accounting for about 10.8 percent
of Sri Lanka’s overall debt. These debt obligations are a major reason why Sri Lanka is
facing this current crisis. Implemented a value-added tax cut and an income tax cut despite
warnings from the International Monetary Fund, for unknown reason government waived
taxes GST.
(IMF, 2020) These tax cuts have cost Sri Lanka lost more than 2% of its gross
domestic product, impacting its ability to service its debt. Another premature policy was to
implement a ban on the import of non-organic fertilizers without preparing farmers for the
change. Rice production fell by about 20% in half a year; forcing the government to import
about $450 million worth of rice, further putting pressure on foreign exchange reserves.
Combined with her COVID-19 pandemic, which has led to a significant drop in tourism, and
Russia's invasion of Ukraine, which has boosted the price of oil and commodities, these two
measures will allow Sri Lanka to move into her May 2022 We were forced to default on
gasoline and blackouts. For up to 13 hours a day, ordinary Sri Lankan citizens have taken to
the streets to demand the government's resignation as it has not addressed the situation.
(https://www.cfr.org/blog, 2022)
The government mainly blamed the Covid-19 pandemic, which badly affected Sri
Lanka's tourist trade - one of its biggest foreign currency earners. However, many experts
blame poor economic mismanagement is also one of cause. Sri Lanka chose to focus on
providing goods to its domestic market, instead of trying to boost foreign trade. This meant
its income from exports to other countries remained low, while the bill for imports kept
growing and it had affected profit of government. (https://www.moneycontrol.com/news,
2022)
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Sri Lanka currently imports $3 billion (£2.3 billion) more than it exports each year,
resulting in a foreign exchange shortage. At the end of 2019, Sri Lanka's foreign exchange
reserves were at her $7.6bn (£5.8bn), but had fallen to around $250m (£210m). The president
has also been criticized for the drastic tax cuts he introduced in 2019, which have taken the
government to over $1.4 billion (£1.13 billion) in annual revenue. (treasury.gov.lk, 2022) The
Covid-19 pandemic in 2020 made the bad situation worse Exports of tea, rubber, spices and
garments suffered. Tourism arrivals and revenues fell further Due to a rise in government
expenditures, the fiscal deficit exceeded 10% in 2020-21, and the debt to GDP ratio rose from
94% in 2019 to 119% in 2021. (treasury.gov.lk, 2022)
The Crisis in Sri Lanka is triggered due to a shortage of foreign exchange (forex)
reserves, which have dropped by 70% over the last two years to just USD 2 billion by the end
of February 2022.Meanwhile, the country has foreign debt obligations of about USD 7 billion
for 2022. (ADO, 2022)
Sri Lanka is scheduled to participate in many international tournaments at Asian and
World level but many sports bodies are unable to submit their entries because of the dollar
crisis. (https://www.dailymirror.lk/sports, 2022)
2. METHODOLOGY
Many articles from 2020 to today are filtered. Duplicates and unreliable sources were
removed and only 45 popular messages were included in the study. However, the keywords
'Sri Lanka Economy' and 'Lanka' and 'Economic and Political Crisis Sri Lanka' have only had
negative news due to the lack of balance of payments reports for the past two years. This is
also a notable observation when searching for information about web content.
3. SRI LANKA GDP
Source: (https://www.adb.org/news, 2022)
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According to the (SLTDA, 2021) Sri Lanka Tourism Development Authority
(SLTDA), the number of tourist arrivals decreased by 60 per cent in June. The situation had
arisen due to the unprecedented economic crisis. As per SLTDA data, 106,500 tourists
arrived in March 2022, but the number dwindled to 32,856 in June. July and August are the
best months for tourism in Sri Lanka. Tourism earned Sri Lanka USD 4.4 billion and
contributed 5.6 per cent to GDP in 2018, but this dropped to just 0.8 per cent in 2020 due to
many reason.
Source: (https://www.adb.org/news, 2022)
(IMF, 2020) The government was left with a large deficit. Sri Lanka fell back on its
foreign exchange reserves to pay off government debt, shrinking its reserves from USD 6.9
billion in 2018 to USD 2.2 billion this year. This year, Sri Lankans facing with long power
cuts, shortages of fuel and gas and soaring prices of food. The country, with an acute foreign
currency crisis that resulted in foreign debt default, had announced in April that it is
suspending nearly $7 billion foreign debt repayment due for this year out of about $25 billion
due through 2026. Sri Lanka's total foreign debt stands at $51 billion.
(https://www.theweek.in/newsl, 2021)
The textile hub of Tamil Nadu and tea estates of southern India and Assam are
witnessing a surge in overseas orders as the export demand has diverted to India from Sri
Lanka owing to the economic and political crisis in the island nation. Garments and tea are
the major exporter from Sri Lanka (https://economictimes.indiatimes.com, 2022). The UK is
Sri Lanka’s third biggest source of inbound tourists behind Russia and India. Tourism
accounts for about 5 per cent of Sri Lanka's Gross Domestic Product (GDP), with Britain,
India and China being the main markets. (https://www.hindustantimes.com, 2021)
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Sources (World Bank,2022)
4. INFLATION IS RECORD HIGH IN SRILANKA
Source (https://www.dailymirror.lk, 2022)
Prices Rising:
The retail price of rice in the last week was 60 per cent more than the year-ago level,
while the price of onions was 78 per cent, that of potatoes 65 per cent, and that of an egg was
94 per cent higher year-on-year.
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Source: (CBS, 2021)
Source: (CBS, 2021)
Altogether, headline inflation rose to 18.7 per cent in March 2022 from 15.1 per cent
in February 2022. Food inflation stood at 30.2 per cent in March,
(CBS, 2021) "The import price of crude oil significantly increased by 45.9 per cent in
January 2022 (Y-o-Y). Further, the import prices of sugar and wheat increased by 21.1 per
cent and 18.6 per cent respectively, in January 2022 (Y-o-Y)," the country's central bank
explained. (https://www.indiatoday.in, 2021)
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Source: (https://www.aljazeera.com, 2021)
The island nation’s foreign reserves stood at a paltry $1.93bn at the end of March,
with foreign debt payments of about $4bn due this year, including a $1bn international
sovereign bond maturing in July. Despite citizen protests against inflation that’s running at
17-20 32 percent and daily electricity cuts of as long as 13 hours.
(https://timesofindia.indiatimes.com, 2021)
(CBS, 2021) Sri Lanka’s gross debt servicing would amount to $7bn in 2022 and a
current account deficit of approximately $3bn. “The market was expecting this default to
come and now we have to see how the new government handles the onshore chaos.”
Sri Lankan doctors warn life-saving drugs are running out, and say the country's
economic crisis threatens a higher death toll than the coronavirus pandemic. Power outages
and severe shortages of food, fuel and medicine have left Sri Lanka in a state of widespread
devastation, suffering its worst recession since independence in 1948.
(https://www.theguardian.com, 2022).
Source: (New18, 2022)
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5. AGRICULTURE CRISIS
In 2021, suddenly all fertilizer imports were completely banned and Sri Lanka was
declared to become a 100% organic farming country overnight. This overnight switch to
organic fertilizers had a significant impact on food production. As a result, Sri Lanka's
president declared an economic emergency to stem rising food prices, currency depreciation
and a rapid depletion of foreign exchange reserves. (https://www.drishtiias.com, 2021)
The rice and banana farmer no longer has the income to run his farm after a
government ban on chemical fertilizers cut his rice yield in half during the March harvest
season. Especially since his banana harvest is doomed to failure. His two million farmers,
who make up 30% of his workforce and had hitherto relied on subsidized chemical fertilizers,
were suddenly forced to fend for themselves. They said the government has not increased
organic fertilizer production or imported enough soil nutrients to meet their needs..
(https://www.drishtiias.com, 2021)
(WorldBank, 2021) has given us money to buy fertiliser and a few other agencies and
countries are to help us too” But with Sri Lanka’s foreign reserves having dwindled to $1.8bn
at the end of April and Russia’s invasion of Ukraine pushing up fertiliser prices in the world
market, experts said it is not clear how the government can afford to import enough soil
nutrients for its two million farmers, much less subsidies them.
(Weerakoon, 2022) The government and private parties had spent about $259m on
importing fertiliser in 2020. The bill for 2021 could be between $300m-440m and potentially
double that this year.
The government has kept its promises, banning the import and use of synthetic
fertilizers and pesticides nationwide and ordering the country's two million farmers to switch
to organic farming. Domestic rice production, a conventional farm, fell by 20% in his first six
months alone. Long self-sufficient in rice, Sri Lanka has been forced to import $450 million
worth of rice, even as domestic prices for the nation's staple food have risen by about 50%. It
has been. The ban also hit the country's tea production, a major export and source of foreign
currency. The government has also provided the farmer with her direct compensation of
US$200 million and a further US$149 million in subsidies to the rice farmers who suffered
losses. It has barely made up for the damage and suffering caused by the ban. Farmers are
very poorly paid and provide one of the main sources of employment for many farmers,
especially in rural Sri Lanka. It has been widely criticized for shutting out tea producers who
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do The reduction in tea production alone is estimated to result in an economic loss of US$425
million.(https://foreignpolicy.com, 2021)
6. CHINA ROLES AND DEBT TRAP ON SRI LANKA
Sri Lanka has borrowed heavily from Beijing for infrastructure projects since 2005,
much of which has become a white elephant (no longer necessary/useful). Sri Lanka also
leased Hambantota port to a Chinese company in 2017 after failing to repay a $1.4 billion
debt from Beijing used to build Hambantota port. Sri Lanka's $81 billion economy is on the
brink of collapse. The country now has to pay back more than three times her foreign
exchange reserves, putting it at risk of default. There are many contributing factors to the
ongoing crisis, from debt traps to inflation. Sri Lanka has about US$2 billion in foreign
exchange reserves and her total debt service target for 2022 is US$7 billion. Of these, US$1
billion worth of bonds will mature in July 2022. Sri Lanka's external debt has increased
sharply since 2005. In 2005 he was US$11.3 billion, in 2010 he was US$21.7 billion, in 2015
he was US$43.9 billion, and in 2020 he was US$56.3 billion during the Covid pandemic.
Did. China accounted for her 10% of loans, and in April 2021 India accounted for her 2%.
Source:(Resources, 2022)
The trouble was that the country’s external debt rose quicker than the GDP. The external debt
to GDP ratio rose from 31.6 per cent in 2010 to 32.4 per cent in 2015, and further to 40.4 per
cent in 2020.
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(Source: Department of External Resource, Sri Lanka)
(Resources, 2022) Despite the country's attempts to rebuild its economy amid the
pandemic, tourism has been hit hard, with Sri Lanka's tourism supporting 10-15% of the
economy. The impact of the COVID-19 crisis, the loss of tourists, the reduction in
government revenues due to high government spending and tax cuts, and the use of funds for
minimally profitable initiatives have all contributed to Sri Lanka's economic collapse. I'm
here. The 9th, 10th, and 11th grade semester tests are part of an ongoing evaluation process
that determines whether students will advance to the next grade at the end of the school year.
An economic crisis caused by a shortage of foreign exchange reserves to fund essential
imports has left the country running out of food, fuel and medicine.
(https://www.aljazeera.com/news/2022, 2022)
Russia is the third largest market for Sri Lanka's tea exports. The war between Russia
and Ukraine has resulted in Russia being blocked from her global SWIFT payment system,
leaving the country unable to pay Sri Lanka. Sri Lanka asked China for help, asking for her
$1 billion loan to repay and her $1.5 billion line of credit to purchase Chinese goods, but
even after months of negotiations, no progress seen. (https://theprint.in, 2022) Sri Lanka
couldn’t tap a $1.5 billion credit line from China and has yet to hear back on the request to
China for a $1 billion loan, (Bloomberg, 2022) “China is, of course, a very important creditor
of Sri Lanka. Sri Lanka is clearly unable to repay that debt. And it’s my hope that China will
be willing to work with Sri Lanka to restructure the debt — it would likely be both in China
and Sri Lanka’s interest,” (Yellen, 2022). Political observers underline Sri Lanka is currently
in a tough spot over debt owed to China.
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7. GOVERNMENT MEASURES
Short-term import restrictions may have reduced spending and thus the trade balance,
but since Sri Lanka's export industry relies heavily on imports of intermediate capital goods,
a long-term import ban would also affect exports. The import ban has had a negative impact
on many importers. The government's policy of banning chemical fertilizers has also been
heavily criticized as it could affect agricultural production and escalate food insecurity in the
country.
(EU, 2022) The European Union and the embassies of France, Germany, Italy, the
Netherlands and Romania issued a joint statement on November 19, 2020, criticizing the Sri
Lankan government's import restrictions, arguing that the extension of the import ban is
inconsistent with global trade. Organizational regulations and this can have a negative impact
on foreign direct investment as well as Sri Lankan and European companies. Indian aid is
also helping to address fuel shortages. Sri Lanka relies heavily on her US$1 billion from
India to pay for imports of food and medicines. (Minister, 2020)
(Fernando, 2022) Bangladesh has extended a $200 million currency swap facility.
China expands $1.5 billion swap facility Sri Lanka has also received her US$700 million
from the China Development Bank. India has so far pledged US$2.4 billion in financial
support for her, including: (a) US$400 million under the SAARC Currency Swap Agreement;
(b) A.C.U. deferred two-month comparison of $515.2 million. (c) her US$500 million for
importing fuel from India; (d) her US$1 billion in importing food, essentials and medicines;
In addition, Indian Oil Corporation delivered her 40,000 tons of fuel on her 60-day credit.
(https://www.ndtv.com, 2022). As part of the financial assistance package, India also agreed
to actively contribute to improving Sri Lanka's energy security by signing a memorandum of
understanding to jointly develop the Trincomalee Oil Terminal. Pakistan and Qatar also
agreed to aid. Pakistan has agreed to provide her $200 million credit line for the importation
of cement, basmati rice and pharmaceuticals manufactured in Pakistan. Details have yet to be
finalized between the two countries. CBSL has reportedly entered into talks with the Qatar
Central Bank to secure a swap worth over $1 billion. (CBS, 2021)
(IMF, 2020) Sri Lanka needs at least USD 4 billion to tide over its mounting
economic woes, and authority has been holding talks with the World Bank and countries like
China and Japan for Financial assistance. Going forward, the IMF team will support Sri
Lanka's efforts to overcome the current economic crisis by working closely with the
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authorities on their economic programme, and by engaging with all other stakeholders in
support of a timely resolution of the crisis, (https://www.business-standard.com, 2022)
(CBS, 2021) Central bank data obtained by Reuters, Sri Lanka currently has about $2
billion in foreign exchange reserves against $7 billion in total debt due this year, including $1
billion worth of notes maturing in July. (https://www.cnbc.com, 2022)
(WorldBank, 2021) Sri Lanka will receive $300 million to $600 million from the
World Bank over the next four months to buy medicine and other essential items, the
country's finance minister authority, as the Indian ocean island suffers its worst economic
crisis in decades.Neighboring India has also agreed to provide $500 million to purchase fuel,
and negotiations are underway on an additional $1 billion from New Delhi, which has already
provided a credit line of $ 1 billion. (https://economictimes.com, 2022)
8. CHALLENGES FOR INDIA
Sri Lanka's share of India's total exports fell from 2.16% in FY2015 to just 1.3% in
FY2022. Auto companies such as Tata Motors and TVS Motors have stopped exporting
vehicle kits to Sri Lanka and halted production at assembly plants in Sri Lanka due to
unstable foreign exchange reserves and fuel shortages. Whenever there is a political or social
crisis in Sri Lanka, India has seen a massive influx of refugees from the Tamil community
into India from the Sinhala country through the Palk Strait and Munnar Bay.
Sri Lanka's economy is declining rapidly. However, the contagion from the Lanka
crisis has also hit Indian companies such as the auto sector. ITC's first foreign-affiliated
company in the hotel sector was hit hard. Earlier, construction of his $300 million project in
Colombo was affected by the 2019 terrorist attacks and subsequent pandemic.
(financialDaily, 2022) Automotive firms like Tata Motors, Mahindra & Mahindra, Ashok
Leyland, and TVS Motors had stopped exports of vehicle kits to Sri Lanka and halted
production at their Sri Lankan assembly units due to its precarious forex reserves and fuel
shortages. Instability in Sri Lanka could affect Indian Oil, Airtel, Taj Hotels, Dabur, Ashok
Leyland, Tata Communications, Asian Paints, and State Bank of India.
Meanwhile, Sri Lanka’s share in India’s total exports has declined from 2.16 per cent
in FY15 to just 1.3 per cent in the first 10 months of FY22.India’s export to Sri Lanka is now
nowhere near the 6.7 billion dollars seen in 2014-15. Till January 2022, it stood at 4.49
billion dollars in FY22. (www.business-standard.com, 2022) principal cause of the
problem—linking the fall in earnings from the tourism sector (one of the most significant
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contributors to Sri Lanka’s GDP) from over US$4 billion in 2018 to less than the US $150
million in 2021 to the drop in the country’s forex reserves—this crisis long been in the
making. Between 2009 and 2018, Sri Lanka’s trade deficit swelled from US$5 billion to
US$12 billion.
9. ANALYSIS AND DISCUSSION
1. Improving agricultural productivity in all areas of agriculture is the first important
aspect. The use of organic farming with chemicals and fertilizers should be approved
with immediate effect by governments. All farmers in the country are required to use
organic fertilizers and the country aims to replace all synthetic fertilizers in the next
decade or time. For a country that relies as heavily on its agricultural industry as its
pandemic-hit tourism sector, this will help boost the productivity of rice, coconuts and
other crops in Sri Lanka's agriculture.
2. Investment in non-agricultural job creation. In a country as dependent on tourism as
Sri Lanka, where the sector is his third largest market in the country, the Covid-19
pandemic has dealt a fatal blow to economic growth. Declining international tourism
means less funding for projects to develop new hospitality infrastructure. But a World
Bank report urges governments to invest foreign aid in tourism development and
expansion.
3. Welfare scheme is what the country needs to develop and put in place. Owing to the
unregulated hours and low pay in the informal labour market, productivity is abysmal.
4. Government education, worker health and general benefits will go a long way as
productivity increases. Additionally, Sri Lanka needs to establish more government-
funded educational institutions to enable more Sri Lankans to use their skills for better
industrialization of the agriculture and tourism sectors.
5. The crisis has severe implications for human rights, Sri Lankan experts said.
Continuing disruptions in access to food and health care are severely impacting the
sick, pregnant women, nursing mothers and the elderly in dire need of life support.
6. Sri Lanka needs extensive economic reforms to achieve long-term sustainable growth
in order to be able to repay its debt. We also need stable governments to emerge
stronger from this crisis. Stable monetary policy is critical to maintaining
macroeconomic stability and confidence in local currencies. The current economic
crisis facing Sri Lanka makes it clear that an independent central bank is paramount.
7. Fair taxation system should be imposing as per requirement of government and can
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adopt changes as per need from the market.
8. The country’s prolonged political instability in the country may delay progress on
negotiations with the International Monetary Fund for a bailout package.
Conclusion:
The economy has endured several shocks in recent years with a number of policy
actions. A 'catastrophic' collapse of organic farming with massive tax cuts, interest rate cuts
and a ban on the import of all fertilizers and pesticides. adopted by the government; most
recently, it also had to deal with an unexpected increase in import bills due to the Ukrainian
crisis. The country's current external debt stands at over $50 billion, most of which (nearly
47%) is borrowed from the market, primarily through international government bonds (ISBs).
for 2-month imports). Slow and steadily government should advocate all essential measure
for the upliftment of all section from the society especially poor from the crisis.
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