[Answered] What led to the economic crisis in Sri Lanka? Highlight the lessons that can be taken from this crisis.  

Introduction: Contextual introduction.
Body: Write some reasons which led to the economic crisis in Sri Lanka.  Also, write some lessons that can be learnt from this crisis.
Conclusion: Write a way forward.

The Sri Lankan economic crisis is an ongoing crisis in the island-state of Sri Lanka that started in 2019. It is the country’s worst economic crisis since its independence in 1948. It has led to unprecedented levels of inflation, near-depletion of foreign exchange reserve, shortages of medical supplies, and an increase in prices of basic commodities.

Reasons behind the economic crisis in Sri Lanka

  • Twin deficit: Sri Lanka is facing a budget shortfall alongside a current account deficitThe country’s national expenditure exceeds its national incomeCapital-intensive projects (e.g., Hambantota port) did not deliver the expected returns.
  • BOP crisis led to the devaluation of Sri Lankan currency hitting payments for essential items and debt servicing.
  • Decline in foreign exchange reserve:It gave rise to high uncertainty among people regarding the nation’s economic stability in the coming time.
  • Spiralling debt: Sri Lanka has borrowed repeatedly since 2007 leading to $11.8 billion worth of piled-up debt which makes up 36.4% of its external debt.
  • Difficulty in getting international credit:Many rating agencies downgraded Sri Lanka’s sovereign ratings to the junk category citing rising repayment pressures and “uneven access” to financing as reasons.
  • Decline of Tourism Industry: due to Easter bombings in 2019 and the Covid pandemic.
  • The spike in oil prices on an economy totally dependent on imported oil has also affected the economy.

Lessons that can be taken from this crisis

  • Most oil-importing emerging countries need to worry about their ability to fund increasing import bills constantly.
  • It would be best to raise domestic tax revenue and shrink government expenditure to limit borrowing, particularly sovereign borrowing from external sources.
  • There is a need for ambitious fiscal consolidation based on high-quality revenue measures, raising income tax.
  • The country’s heavy dependence on imports for essential goods should be reduced like sugar, pharmaceuticals, fuel, pulses and cereals worsened the crisis.

Economic crisis in Sri Lanka is a reminder to other countries to constantly introspect their economic policies at regular intervals. It provides a lesson to every nation regarding the adverse consequences that can arise due to ill-timed and irrational policy decisions.

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