Lack of foreign currency led to Rajapaksa’s government is unable to pay for basic imports such as fuel, resulting in devastating power outages lasting up to 13 hours. Ordinary Sri Lankans are also facing scarcity and rising inflation. Anger with Sri Lankan President Gotabaya Rajapaksa’s handling of the island nation’s mounting economic crisis erupted into violence late Thursday, with hundreds of protestors clashing with police for several hours. Due to a lack of foreign currency, Rajapaksa’s government has been unable to pay for basic imports such as fuel, resulting in devastating power outages lasting up to 13 hours. Ordinary Sri Lankans are also experiencing shortages and rising inflation as a result of the country’s severe currency depreciation last month in preparation for talks with the International Monetary Fund (IMF) over a loan program. R. Ramakumar, Professor of Economics at the Tata Institute of Social Sciences Mumbai, April 14: (The Conversation) Sri Lanka is experiencing one of the greatest economic crises in its history. It has just defaulted on its foreign loans for the first time since independence, and the country’s 22 million inhabitants are facing debilitating 12-hour power outages as well as the severe scarcity of food, fuel, and other necessary things such as medications. Inflation is at an all-time high of 17.5 percent, with basic costs such as a kilogram of rice costing 500 Sri Lankan rupees instead of the usual 80 rupees. On April 1, the President, Rajapaksa declared a state of emergency. He withdrew it in less than a week after significant protests by outraged citizens over the government’s handling of the problem. Many important products, such as gasoline, food, and pharmaceuticals, are imported into the country. Most countries will maintain foreign currencies on hand to trade for these commodities, but the sky-high prices in Sri Lanka are being blamed on a lack of foreign exchange. Many people believe that Sri Lanka’s economic links with China are a major cause of the issue. This is when a creditor country or institution extends debt to a borrowing country to boost the lender’s political leverage; if the borrower extends itself and is unable to repay the money, they are at the mercy of the creditor. However, Chinese loans amounted to only around 10% of Sri Lanka’s overall foreign debt in 2020. The majority, almost 30%, can be attributable to overseas sovereign bonds. Japan accounts for a bigger amount of its foreign debt, accounting for 11%. Defaults on China’s infrastructure loans to Sri Lanka, particularly the financing of the Hambantota port, have been highlighted as the causes leading to the crisis. Many individuals believe that Sri Lanka’s economic ties with China are a major contributing factor to the problem. The United States has nicknamed this phenomenon “debt-trap diplomacy.” This occurs when a creditor country or institution extends debt to a borrowing country to increase the lender’s political leverage; if the borrower extends itself and is unable to return the money, the creditor has complete control over the borrower. However, in 2020, Chinese loans accounted for only about 10% of Sri Lanka’s total foreign debt. The majority, over 30%, can be attributed to foreign sovereign bonds. Japan accounts for a larger portion of its foreign debt, accounting for 11%. Defaults on China’s infrastructure loans to Sri Lanka, most notably the financing of the Hambantota hydropower project have been identified as contributing factors to the crisis. True Causes: Following independence from the British in 1948, export-oriented products such as tea, coffee, rubber, and spices dominated Sri Lanka’s agriculture. The foreign cash obtained from exporting these crops accounted for a sizable portion of its GDP. This money was utilized to import necessities such as food. Over time, the country began exporting clothing and generating foreign currency through tourism and payments. Any drop in exports would be an economic shock, putting foreign exchange reserves under pressure. As a result, Sri Lanka frequently had balance-of-payment issues. It received 16 loans from the International Monetary Fund beginning in 1965. (IMF). Each of these loans came with requirements, such as reducing the budget deficit, maintaining a restrictive monetary policy, reducing government subsidies for food for the people of Sri Lanka, and depreciating the currency. However, in times of an economic slump, effective fiscal policy mandates that governments spend more to stimulate the economy. With the IMF’s criteria, this becomes impossible. From 2016 to 2019, the country received US $1.5 billion over three years. In 2019, two economic shocks worsened an already dire position. In 2019, two economic shocks worsened an already dire position. In April 2019, there were a series of bomb attacks on churches and luxury hotels in Colombo. Second, the new government of President Gotabaya Rajapaksa lowered taxes unjustly. Value-added tax rates were reduced from 15% to 8%. The COVID-19 pandemic began in March 2020. The administration committed another grave error in April 2021. To avoid the depletion of foreign exchange reserves, all fertilizer imports were prohibited. Sri Lanka has been designated as a 100 percent organic farming nation. This strategy, which was repealed in November 2021, resulted in a sharp drop in agricultural output, necessitating increased imports. However, foreign exchange reserves were under pressure. Tea and rubber productivity fell as a result of the fertilizer prohibition, resulting in fewer export earnings. Due to decreasing export earnings, there was less money available to import food, resulting in food shortages. Because there is less food and other commodities to buy, but there is no decline in demand, prices for these items rise.
Inflation increased in February 2022. In all likelihood, Sri Lanka will now acquire a 17th IMF loan to help it get through the current crisis, which would come with new terms. A deflationary fiscal plan will be followed, drastically limiting economic recovery possibilities and aggravating the misery of the Sri Lankan people.
Share This Post On
Leave a comment
You need to login to leave a comment. Log-in