Sri Lanka’s economy is going through the worst phase since the country’s financial crisis of 1948. They say that the South Asian island nation is close to defaulting because it has a big debt.
Sri Lanka’s economy heavily depends on tourism. It receives considerable revenue from the tourism industry.
The COVID-19 pandemic hit the tourism industry of Sri Lanka. The first wave of COVID-19 showed signs of economic distress when thousands of labor returned jobless from west Asian countries.
Many garment factories in Sri Lanka were unable to function. Because of the closure of industries, employees become jobless. All the key earning factors, such as exports, tourism, and remittances, were severely hit.
Sri Lanka lost a vital source of foreign income from tourism after a vital source of foreign income from tourism was eliminated.
The recent economic turmoil in Sri Lanka is because of the shortage of foreign reserves and the balance of payments. A balance of payments means the difference between all the money that has entered a country and the amount of money that goes out of the country in a particular period.
The Prime Minister of Sri Lanka, Rajapaksa, has admitted that the country is suffering from a trade deficit of $10 billion. It means it is importing more items than exporting.
The outflow of money is greater than the inflow, which leads to a foreign currency crunch. Sri Lanka’s foreign reserves decreased in 2019 when President Rajapaksa took charge of the post. At the end of February 2022, its reserves fell from $7.5 billion to $2.1 billion. Because of the COVID-19 pandemic, the exports of Sri Lanka decreased by 75%.
Another crucial factor, FDI, also fell. According to government data, Sri Lanka’s FDI decreased to $548 million in 2020. If the FDI of any country decreases, the foreign currency in its reserves will also decrease.
Sri Lanka refuses to take a loan from the IMF. The governor of the central bank of Sri Lanka said, "The IMF is not a magic wand." He further said that other alternatives are better than going to the IMF for a loan.
Another alternative for Sri Lanka to getting a loan is China. In the last two decades, China has been the largest lender and FDI provider to Sri Lanka, but now the loan to Sri Lanka has grown to over $2 billion, and it has to be paid in 2022.
Inflation gets high in Sri Lanka because of a deficit in the balance of payments. A decrease in foreign reserves has resulted in a decrease in vital imports, as Sri Lanka does not have enough money to purchase necessary imports.
It causes an increase in food prices. The inflation rate in Sri Lanka was 15% as of February 2022.
The prices of necessary food items have increased so much that one can barely afford them. The price of staple foods increased quickly. The prices of food, fuel, and medicine are out of reach for the average person.
The high inflation rate in a country leaves its people in great misery. Government data shows that food inflation goes up to 25.7%.
As the Sri Lankan economy has worsened, it faces a fuel shortage and has difficulty affording money because it lacks reserves to import the fuel. People in Sri Lanka wait in queues for hours to get some gas.
There are reports that women collapse in crowds while waiting for fuel. Three men in their late seventies died because of standing in lines under the scorching sun.
On Tuesday, the Sri Lankan government posted soldiers at many gas stations. The rise in fuel prices and shortage forced people to queue for hours outside the gas stations. The government stationed soldiers to help with the ineffective distribution of the fuel.
The Sri Lankan economy has been suffering from a crisis for the past few years. The central bank of Sri Lanka has devalued its currency, the LKR, by up to 15% to qualify for an IMF loan program.
As of March 21, 2022, the exchange rate limit was 275 rupees per dollar. Sri Lanka was already witnessing a crisis because of the pandemic and its ever-growing foreign loan payments. It has to pay $7 billion due this year.
The devaluation of the Sri Lankan LKR causes an unbearable situation for citizens.
The power shortage forced children to study using lamps and kerosene oil. Industries and shops in Sri Lanka have also limited their businesses and production. Because of scarcity, the hydroelectric dams in Sri Lanka cannot fulfil the energy requirements.
Education authorities said we would hold the term tests that were scheduled on Monday because of a shortage of funds.
Because of the ongoing economic crisis and the vast number of protests from the public, the government of Sri Lanka has adopted a "U-turn" policy. The president of Sri Lanka will visit Washington next month to seek aid from the IMF.
China is reportedly considering Sri Lanka’s request for $2.5 billion. India has also stepped in to help its neighbor.
Last week, the finance minister of Sri Lanka, Basil Rajapaksa, visited New Delhi. The State Bank of India and the government of Sri Lanka came to an agreement.
India agreed to give Sri Lanka a $1 billion credit, which will make sure that Sri Lanka can buy things like food and medicine for its people.
Image by Clker-Free-Vector-Images from Pixabay
Sri Lanka’s economy heavily depends on tourism. It receives considerable revenue from the tourism industry.
The COVID-19 pandemic hit the tourism industry of Sri Lanka. The first wave of COVID-19 showed signs of economic distress when thousands of labor returned jobless from west Asian countries.
Many garment factories in Sri Lanka were unable to function. Because of the closure of industries, employees become jobless. All the key earning factors, such as exports, tourism, and remittances, were severely hit.
Sri Lanka lost a vital source of foreign income from tourism after a vital source of foreign income from tourism was eliminated.
Why is Sri Lanka Facing an Economic Crisis?
Sri Lanka is facing its worst economic crisis since independence. Sri Lanka has been hit hard by the COVID-19 pandemic and the Russia-Ukraine conflict.The recent economic turmoil in Sri Lanka is because of the shortage of foreign reserves and the balance of payments. A balance of payments means the difference between all the money that has entered a country and the amount of money that goes out of the country in a particular period.
The Prime Minister of Sri Lanka, Rajapaksa, has admitted that the country is suffering from a trade deficit of $10 billion. It means it is importing more items than exporting.
The outflow of money is greater than the inflow, which leads to a foreign currency crunch. Sri Lanka’s foreign reserves decreased in 2019 when President Rajapaksa took charge of the post. At the end of February 2022, its reserves fell from $7.5 billion to $2.1 billion. Because of the COVID-19 pandemic, the exports of Sri Lanka decreased by 75%.
Key Factors that have Affected Sri Lanka’s Economy
Its tourism industry contributes to 10% of the GDP of a country. Because of the decrease in tourism because of COVID-19, foreign currency was devastated. Sri Lanka’s major export destinations, like China and European Union countries, had issues with trade from Sri Lanka because of COVID-19. It led to reduced foreign exchange earnings.Another crucial factor, FDI, also fell. According to government data, Sri Lanka’s FDI decreased to $548 million in 2020. If the FDI of any country decreases, the foreign currency in its reserves will also decrease.
Sri Lanka refuses to take a loan from the IMF. The governor of the central bank of Sri Lanka said, "The IMF is not a magic wand." He further said that other alternatives are better than going to the IMF for a loan.
Another alternative for Sri Lanka to getting a loan is China. In the last two decades, China has been the largest lender and FDI provider to Sri Lanka, but now the loan to Sri Lanka has grown to over $2 billion, and it has to be paid in 2022.
Economic Crises have Ramifications
The recent crisis has caused immense economic turmoil for the people of Sri Lanka. Angry people came out of their homes and protested against the government.Inflation gets high in Sri Lanka because of a deficit in the balance of payments. A decrease in foreign reserves has resulted in a decrease in vital imports, as Sri Lanka does not have enough money to purchase necessary imports.
It causes an increase in food prices. The inflation rate in Sri Lanka was 15% as of February 2022.
The prices of necessary food items have increased so much that one can barely afford them. The price of staple foods increased quickly. The prices of food, fuel, and medicine are out of reach for the average person.
The high inflation rate in a country leaves its people in great misery. Government data shows that food inflation goes up to 25.7%.
As the Sri Lankan economy has worsened, it faces a fuel shortage and has difficulty affording money because it lacks reserves to import the fuel. People in Sri Lanka wait in queues for hours to get some gas.
There are reports that women collapse in crowds while waiting for fuel. Three men in their late seventies died because of standing in lines under the scorching sun.
On Tuesday, the Sri Lankan government posted soldiers at many gas stations. The rise in fuel prices and shortage forced people to queue for hours outside the gas stations. The government stationed soldiers to help with the ineffective distribution of the fuel.
The Sri Lankan economy has been suffering from a crisis for the past few years. The central bank of Sri Lanka has devalued its currency, the LKR, by up to 15% to qualify for an IMF loan program.
As of March 21, 2022, the exchange rate limit was 275 rupees per dollar. Sri Lanka was already witnessing a crisis because of the pandemic and its ever-growing foreign loan payments. It has to pay $7 billion due this year.
The devaluation of the Sri Lankan LKR causes an unbearable situation for citizens.
A Nationwide Power Outage
Due to fuel shortages and a lack of foreign currency, the government of Sri Lanka cannot pay for oil imports. The government issued nationwide power cuts that go up to seven and a half hours a day.The power shortage forced children to study using lamps and kerosene oil. Industries and shops in Sri Lanka have also limited their businesses and production. Because of scarcity, the hydroelectric dams in Sri Lanka cannot fulfil the energy requirements.
Exams Cancelled in Sri Lanka
The terrible economic crisis in Sri Lanka also affects many students. The Sri Lankan government also cancelled exams in Sri Lanka because of a paper shortage. The shortage was caused by the lack of funds to finance imports.Education authorities said we would hold the term tests that were scheduled on Monday because of a shortage of funds.
Because of the ongoing economic crisis and the vast number of protests from the public, the government of Sri Lanka has adopted a "U-turn" policy. The president of Sri Lanka will visit Washington next month to seek aid from the IMF.
China is reportedly considering Sri Lanka’s request for $2.5 billion. India has also stepped in to help its neighbor.
Last week, the finance minister of Sri Lanka, Basil Rajapaksa, visited New Delhi. The State Bank of India and the government of Sri Lanka came to an agreement.
India agreed to give Sri Lanka a $1 billion credit, which will make sure that Sri Lanka can buy things like food and medicine for its people.