How bad is Sri Lanka’s economic crisis?
Sri Lanka is going through its worst economic crisis since 1948, when the country gained independence. The prices of essential items like food, fuel and medicines have sky-rocketed with a kilo of rice costing as much as 500 Sri Lankan rupees and sugar 290 rupees. The citizens have to stand in queues for hours even to get essential commodities. Troops have been deployed at state-run fuel stations to help in distribution. The people have to endure daily power cuts of more than seven hours. The administration recently had to cancel the school examinations due to shortage of ink and paper. The inflation had surged to 15.1 per cent in February. The country’s debt to debt-to-GDP ratio was 119 per cent in 2021.
How did it come to this stage?
The main reason for the island nation’s plight is the depletion of its forex reserves. A heavily import dependend nation is left with just $2 billion reserves, leaving Sri Lanka , not able to import even essential commodities.
Sri Lankan President Gotabaya Rajapaksa admitted that the country has a trade deficit of $10 billion, the root cause for the drop in its forex reserves. Sri Lanka has foreign debt obligations of $7 billion, including $1 billion worth sovereign bonds to be repaid by July this year. The collapse of the tourism industry, contributing nearly 10 per cent of its GDP is also a reason for this fiasco. The pandemic, coupled with the 2019 Easter bombings led to a fall in the tourism revenues from $7.5 billion in 2019 to $2.8 billion last year. To make matters worse, a blanket ban on chemical fertilisers by the administration last year crippled the agriculture sector with tea cultivation and its exports, one of the mainstays of the economy getting affected.
Has the Ukraine crisis complicated matters for the island nation?
A significant portion of tourists who travel to Sri Lanka are from Russia and Ukraine and the war had dented their arrivals. . Sri Lanka exports its tea to these two nations and imports almost half of its wheat and sunflower oil from them.The war has caused oil prices to spike exacerbating its forex crisis.
How has the country responded to the crisis?
In September last year, Sri Lanka declared an economic emergency to control food supply amid soaring inflation. The country had devalued its currency and imposed import curbs on many items to prevent further depletion of its forex reserves. It had also partially revoked the fertiliser ban. The island nation has approached the IMF for debt restructuring and a possible bailout.
Will this situation affect India? How has India helped its southern neighbour?
On March 22, 16 Sri Lankan Tamils arrived at the Tamil Nadu coast. With the worsening situation, more influx of Lankan refugees are expected to reach the Indian shores. To help its neighbour, India had offered a billion dollar line of credit to import food and medicines. It had also extended a $500 million credit line last month to help Sri Lanka purchase petroleum products. A few days ago, Sri Lanka sought an additional $1.5 billion credit line for importing essentials.