Aggravating Economic Crisis of Sri Lanka

This topic of “Aggravating Economic Crisis of Sri Lanka” is important from the perspective of the UPSC IAS Examination, which falls under General Studies Portion.

Context

Sri Lanka’s economic crisis

• It is aggravating rapidly, putting citizens through enormous hardship.

What the editorial is about?

• The reason why the island nation reaches this point.
• The way India extended support and assistance to Sri Lanka.

What caused this crisis?

The first wave of the pandemic

• It offered early and sure signs of distress in 2020 which includes

Remittance

• Thousands of Sri Lankan labourers in West Asian countries were left stranded and returned jobless.

Impacts of the Lockdown

• Garment factories and tea estates could not function, as infections raged in clusters.
• The tourism sector saw a big dip.
• Thousands of youths lost their jobs in cities as establishments abruptly sacked them or shut down.

Forex

• All key foreign exchange earning sectors, such as exports and remittances, along with tourism, were brutally hit.

Actions from the Government

Lack of a comprehensive strategy

• The lack of a comprehensive strategy to respond to the crisis then was coupled with certain policy decisions last year.

Ill-advised

• It included the government’s abrupt switch to organic farming —widely deemed “ill-advised”, further aggravated the problem.

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.

Looming external loans

• Fears of a sovereign default rose by the end of 2021, with the country’s foreign reserves plummeting to $1.6 billion, and deadlines for repaying external loans looming.
• Without enough dollars to import essentials such as food, fuel, and medicines, the year 2022 began on a rather challenging note, marked by further shortages and economic upheaval.

What is happening on the ground?

On a Macro-economic level

• All indicators are worrisome.

Sri Lankan Rupee

• The Sri Lankan rupee, which authorities floated this month, has fallen to nearly 265 against the U.S. dollar.

Consumer Price Inflation and Forex reserves

• Consumer Price inflation is at 16.8% and foreign reserves stood at $2.31 billion at the end of February.

Foreign Debt

• Sri Lanka must repay foreign debt totalling nearly $7 billion this year and continue importing essentials from its dwindling dollar account.

Trade Deficit

• Sri Lanka will incur an import bill of $22 billion this year, resulting in a trade deficit of $10 billion.

For citizens

• All these means
  • long waits in queues for fuel
  • a shortage of cooking gas
  • contending with prolonged power cuts in many localities
  • struggles to find medicines for patients.

How is India helping?

India’s neighbourhood’s first policy

• India stands with Sri Lanka.

The key element of the package of support extended by India

• $1 billion credit line signed for the supply of essential commodities.
• Beginning January 2022, India has extended assistance totalling $ 2.4 billion — including a $400 million RBI currency swap and a $500 million loan deferment.

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

Inking key infrastructure projects

• Though the leadership has thanked India for the timely assistance, there is growing scepticism in Sri Lankan media and some sections, over Indian assistance “being tied” to New Delhi inking key infrastructure projects.
• They mainly include the strategic Trincomalee Oil Tank Farm project; the National Thermal Power Corporation’s recent agreement with Ceylon Electricity Board to set up a solar power plant in Sampur, with investment from India’s Adani Group.

Diplomatic blackmail

• The media over Sri Lanka took a position that New Delhi was resorting to “diplomatic blackmail”

Back Door Entry

• The political opposition has accused the Adani Group of entering Sri Lanka through the “back door”, avoiding competitive bids and due process.

How China is responding?

• 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.

Conclusion

• Sri Lanka is in the midst of a severe economic crisis, with reserves decreasing and the government unable to afford the cost of essential imports.

Practice Question for Mains

1. Sri Lanka is in the grips of one of its worst economic meltdowns in history. Examine. (250 Words, 15 Marks)