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Marumegh; Volume-8 (4) : 2023
ISSN 2456-2904 Page 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
atta
c
k
s
,
an
d
th
e
e
ff
e
c
t
of
t
he
(
C
OV
I
D-
1
9
)
v
i
r
us
w
hi
c
h
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 th
e
c
oun
try's
e
x
te
r
na
l
d
e
bt
ob
li
gat
i
o
ns
i
n
2
022
.
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
f
or
e
i
g
n
d
e
bt
s
.
The
S
ri
L
anka
n
r
up
ee
f
e
ll
to its lowest in April 2022, as the world's worst- performing currency, with the US dollar
trading in Sri Lankan rup
ee.
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
orde
r
to
pre
v
e
n
t
a
h
ard
de
f
au
l
t
.
.
S
r
i
Lank
a
's
unblemished record of service of its external debt
has also been broken by the announcement. The
Governor of the (CBSL) insisted that Sri
Lanka would
restructure its debt to avoid a hard default. 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
Marumegh (2023); 8(4) Page No. 01-06
MARUMEGH
Kisaan E- Patrika
Available online at www.marumegh.com
ISSN : 2456-2904
© marumegh 2023
Received: 27-07-2023
Accepted: 01-08-2023
CAUSES AND IMPACT OF ECONOMIC CRISIS IN
SRI LANKA
*Balai H. K.1, Bairwa K.C.2, and Meshram M.3
1Assistant Professor, COA, Indore, RVSKVV, Gwalior, Madhya
Pradesh.
2Associate Professor (Agricultural Economics), COA, Sriganganagar,
SKRAU, Bikaner, Rajasthan.
3Assistant Professor, Pt. Shiv Kumar Shastri COA and Research Station,
Surgi Rajnandagaon, IGKV, Raipur, Chhattisgarh.
*Corresponding author Email: harkeshbalai15@gmail.com
Marumegh; Volume-8 (2) : 2023
Balai et. al., (2023). Causes and Impact of Economic Crisis in Sri Lanka
ISSN 2456-2904 Page 2
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.
Causes of Sri Lanka Economic Crisis:
1. The external debts of Sri Lanka
2. The Sri Lanka tourism sectors
3. The Sri Lanka agriculture crisis
4. The tax reductions and money creation
5. Tea exports and tourism have been affected
the Russian-Ukrainian war
1. The external debts 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
9
Pe
r
c
e
nt
ag
e
of
i
ts
G
D
P
i
n
2
021
.
S
ri
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.
2. The Sri Lanka tourism sectors:
The tourism industry in Sri Lanka was negatively affected by the Easter bombings
of 2019 and the
CO
VI
D-
19
pan
dem
i
c
th
a
t
f
ol
l
owe
d
.
I
n th
e
e
v
e
nt 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.
3. The Sri Lanka 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. The drop in tea production due to the
fertilizer ban alone
resulted in losses of millions of dollars.
4. The 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
Marumegh; Volume-8 (2) : 2023
Balai et. al., (2023). Causes and Impact of Economic Crisis in Sri Lanka
ISSN 2456-2904 Page 3
tax cuts, government revenue and fiscal policies have s
uf
f
e
re
d,
res
ul
ti
ng
i
n s
oari
ng
bud
ge
t
de
f
i
c
i
ts.
Among these measures were the increased tax-free thresholds, which decreased the
number of 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.
5. Tea exports and tourism have been affected
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. Due to the
Russian invasion of Ukraine in 2022, Sri Lanka has suffered further economic 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. 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.
Impacts of Sri Lanka 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
-
1
9
out
b
r
e
a
k
,
w
h
i
c
h h
a
s
a
dv
e
r
s
e
l
y
a
ff
e
c
t
e
d
t
h
e
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.
1. Sri Lanka’s Inflation
2. Fuel and power inefficiency experienced by Sri Lanka’s
3. Education system of Sri Lanka
4. Medical sectors of Sri Lanka and its impact
5. Tourism sector and its impact
6. Impact on export sector
7. Impact on entertainment and sports
1. 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
. The year on year increase in inflation
Marumegh; Volume-8 (2) : 2023
Balai et. al., (2023). Causes and Impact of Economic Crisis in Sri Lanka
ISSN 2456-2904 Page 4
for food was 24.7 percent while non-food items saw an
11
per cent rate. The year on year
change (Feb 2021 to Feb 2022) for local red chilis increased by 60 percent, local potato's
by 74.8 percent and Nadu rice by 64
percent.
2. Fuel and power inefficiency experienced by Sri Lanka’s:
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
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.
3. Impact on Education system of Sri Lanka:
Assume the person has no reason to celebrate after
f
i
n
di
n
g
o
ut th
a
t
e
x
am
s
have
be
e
n
c
a
nc
e
ll
e
d
.
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
f
or
e
i
g
n
r
e
s
e
r
v
e
s to
p
u
rc
ha
s
e
p
a
pe
r
.
D
u
e
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. Almost 4.5 million students in Sri Lanka will be
affected by the financial crisis.
4. Medical sectors of Sri Lanka 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
. 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.
Singapore Red Cross society
declared
the Lanka medical crisis an unexpected humanitarian crisis.
5. 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
Marumegh; Volume-8 (2) : 2023
Balai et. al., (2023). Causes and Impact of Economic Crisis in Sri Lanka
ISSN 2456-2904 Page 5
United Kingdom, Canada, and India cautioned their citizens to pay attention to the ongoing
economic instability in Lanka. 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 media for the most recent updates.
6. Impact on 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. India has experienced a rapid increase in export orders for its textiles and tea
after the economic and political conditions in Sri Lanka deteriorated.
7. Impact 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. In addition, the Indian Premier League 2022, was also
suspended midway due to inability to pay the host broadcaster, Star Sports.
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 neighborhood.
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S
r
i
Lank
a
For
e
x
R
e
s
e
rv
e
s
D
r
op
to US
$
1
.
9
bn
i
n March 2022.”EconomyNext,
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Balai et. al., (2023). Causes and Impact of Economic Crisis in Sri Lanka
ISSN 2456-2904 Page 6
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ht
tp
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//
www.
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t
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c
on
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