|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 deficit. The country’s national expenditure exceeds its national income. Capital-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.