Day 66 – Q 1. Examine the factors that have led to severe economic distress in Sri Lanka. What lessons can be learnt from the ongoing crisis? Discuss. (10 Marks)

1. Examine the factors that have led to severe economic distress in Sri Lanka. What lessons can be learnt from the ongoing crisis? Discuss. (10 Marks)

उन कारकों का परीक्षण कीजिए जिनके कारण श्रीलंका में गंभीर आर्थिक संकट उत्पन्न हुआ है। मौजूदा संकट से क्या सबक सीखा जा सकता है? चर्चा करें।

Approach

Candidates need to write about the Srilankan economic crisis and Indian assistance to it. As question demands need to write about the factors responsible for ongoing crisis and lesson learnt from it. 

Introduction 

India recently extended a $1 billion credit facility to Sri Lanka to assist the island nation through its worst foreign exchange BOP crisis and enable it to procure food, medicines and other essential items. The nation is facing significant fuel and gas shortages, and high inflation in essential goods. 

Body 

Factors that led to severe economic distress:

• 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. 
• Sri Lanka’s Fertiliser Ban: In 2021, all fertiliser imports were completely banned and it was declared that Sri Lanka would become a 100% organic farming nation overnight.
• Shut-down: Garment factories and tea estates could not function, as infections raged in clusters.
• Fuel shortage: Sri Lanka is also facing five-hour rolling electricity blackouts as thermal generators have run out of fuel.
• Food hoarding: The government declared emergency regulations for the distribution of essential food items. It put wide import restrictions to save dollars which in turn led to consequent market irregularities and reported hoarding.
• Downgraded rating: Three international rating agencies have downgraded the island since late last year, on fears it may not be able to service its $51 billion sovereign debt. 
• Spiralling debt: The debt issue did not begin in 2020. Since the end of the ethnic war in 2009, Sri Lanka was struggling to keep its economy afloat.

Lessons learnt from crisis:

• It would be best to raise domestic tax revenue and shrink government expenditure to limit borrowing, particularly sovereign borrowing from external sources.
• Thus, 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.

Conclusion

There is a need to step up our people-centric developmental activities while scrupulously staying clear of any interference in Colombo’s domestic affairs. Nurturing the Neighbourhood First policy with Sri Lanka is important for India to preserve its strategic interests in the Indian Ocean region.