Sri Lanka’s aggravating Economic Crisis

  • IASbaba
  • March 23, 2022
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  • GS-2: India and its neighbourhood
  • GS-2: Effect of policies and politics of developed and developing countries on India’s interests

Sri Lanka’s aggravating Economic Crisis

Context: Sri Lanka is in the grips of one of its worst economic meltdowns in history.

Why factors have led to the crisis? 

  • Pandemic led to job losses and reduced incomes. All key foreign exchange earning sectors, such as exports and remittances, along with tourism, were brutally hit.
  • Declining Foreign Reserves: Fears of a sovereign default rose by the end of 2021, with the country’s foreign reserves decreasing to $1.6 billion. But Sri Lanka managed to keep its unblemished foreign debt servicing record. 
  • Government Inaction: The lack of a comprehensive strategy to respond to the crisis then, coupled with certain policy decisions— including the government’s abrupt switch to organic farming —widely deemed “ill-advised”, further aggravated the problem. 
    • In August 2021, the government declared emergency regulations for the distribution of essential food items along with import restrictions to save dollars. However, these measures led to market irregularities, and hoarding. 

What is happening on the ground? 

  • Falling Currency: The Sri Lankan rupee, that authorities floated this month, has fallen to nearly 265 against the U.S. dollar. 
  • Consumer Price inflation is at 16.8% 
  • Spiralling Debt: Sri Lanka must repay foreign debt totalling nearly $7 billion this year and continue importing essentials from its dwindling dollar account.
  • Trade deficit: President Rajapaksa said Sri Lanka will incur an import bill of $22 billion this year, resulting in a trade deficit of $10 billion. 
  • For citizens, the life has become difficult
    • There are long queues to buy fuel
    • Price of cooking gas spiked to LKR 4,199 (roughly ₹1,150) and price of the widely used milk powder shot up by LKR 600 a kg, translating to cutting down on consumption of these products.
    • Prolonged power cuts in many localities.
    • Struggles to find medicines for patients.
    • Due to a shortage of paper, authorities were forced to cancel school examinations for millions of students.

Is there resistance? 

  • Yes, both citizens and different segments of the political opposition are taking to the streets, demanding that President Rajapaksa resign. 
  • Many media houses are criticising the government, while social media pages are rife with sharp commentary on the government. 

What is the government’s response? 

  • Sri Lankan Government tried to deflect the criticism by pointing towards the distress caused by Pandemic hiding its own mishandling of the deteriorating situation.
  • Government was initially reluctant to seek support of IMF to tide over the crisis but now the government is in talks with the IMF.
  • It remains to be seen how the IMF will support Sri Lanka at this juncture, and to what extent its support might help the country cope with the crisis. 
  • Sri Lankan government has also sought support from various bilateral partners, including India, by way of loans, currency swaps, and credit lines for import of essentials. 

How is India helping? 

  • Beginning January 2022, India has extended assistance totalling $ 2.4 billion — including an 
    • $400 million RBI currency swap
    • $500 million loan deferment
    • Credit lines for importing food, fuel, and medicines. Of this, a billion-dollar credit line was finalised recently.  
  • Meanwhile, China is considering Sri Lanka’s recent request for further $2.5 billion assistance, in addition to the $2.8 billion Beijing has extended since the outbreak of the pandemic.

How is India’s assistance being viewed in Sri Lanka? 

  • Increasing scepticism: The leadership has thanked India for the timely assistance, but there is growing scepticism in Sri Lankan media and some sections, over Indian assistance “being tied” to India inking key infrastructure projects in country like —
    • Strategic Trincomalee Oil Tank Farm project
    • National Thermal Power Corporation’s recent agreement with Ceylon Electricity Board to set up a solar power plant in Sampur, in Sri Lanka’s eastern Trincomalee district
    • Two renewable energy projects in northern Sri Lanka, with investment from India’s Adani Group. The political opposition has accused the Adani Group of entering Sri Lanka through the “back door”, avoiding competitive bids and due process. 
  • There are also criticisms that India was resorting to “diplomatic blackmail” to increase its footprint in the island nation. Cartoonists have depicted Sri Lankan leaders trading crucial energy projects for emergency financial assistance from India. 

Connecting the dots:

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