Gotabaya Rajapaksa, Sri Lankan President had emphatically declared an ‘economic crisis’ on September 1. This emergency announcement came amid an unprecedented surge that was seen in inflation which was coupled and followed with plummeting currency and forex reserves in the Sri Lankan economy.
Sri Lanka’s economic emergency: what really happened?
It is to be noted that various countries have different ways of earning forex exchange in the country. For Sri Lanka, its world-famous scenic coastline and mountains, deeply attract foreigners and thus foreign exchange in the economy.
Thus, it can be rightfully stated that it depends heavily on the tourism sector. According to various estimates, it has been found out that it’s economy’s 10 percent of the country’s Gross Domestic Product (GDP) is actually linked with the tourism industry.
However, given the nature of the pandemic or its virulent characteristic, it is quite decipherable that the tourism sector has taken a major hit. Being a contact-intensive sector, it was the worst hit in terms of revenue in the economy.
What makes Sri Lanka’s economic debacle even more intricate is the burgeoning covid cases in the economy. With lower vaccination, higher covid cases, falling forex exchange, Sri Lanka’s economic debacle can be called the worst in history.
To top this all is the fact that Sri Lanka is a humungous net importer of food and other commodities. Given that its main foreign currency earners have been stifled, the deficiency of food and necessities in the economy will be a reality. With necessity taking a hit, it is quite appropriate to assume that vaccination too will be at an all-time low.
At the end of July, according to the Central Bank of Sri Lanka, the country’s foreign reserves had fallen to USD 2.8 billion. To put this figure in perspective, it had fallen from USD 7.5 billion that was recorded in November 2019.
Organic farming in Sri Lanka
Earlier this year, the Sri Lankan president had taken a resolute pledge that he will make Sri Lanka the first country where farming will be completely organic. This solemn pledge of the government had banned the use of fertilizers and chemicals in agriculture. With this newer experiment, crop production had been affected to a larger extent. From being the World’s one of the top buyout producers of spices and tea and spices, Sri Lanka’s ill-omened experiment led it to its stare at a drastic drop in the yield which it right now is witnessing.
According to the reports, the government is trying the solve the problem by cracking down on the retailers and traders to seize food stocks held in order to regulate their prices in the economy. This has led the Lankan government to appoint a former army general as commissioner of essential services.
This will lead the unsold stock to be sold at government-guaranteed prices. Now given the unprecedented situation where the President declared an economic emergency, the prices of essential commodities like rice, sugar, potatoes, and onions surged. This is due to the fact that the emergency announcement actually led to havoc amongst the people which led to the increase in the demand and thus prices in the economy.
Given the announcement made last week to control spiraling food prices and the plummeting foreign reserves had exporters in India were extremely and emphatically worried. This was due to the fact that the idea to control both detestable attributes of the economy was by placing curbs on imports and foreign currency in the economy.
Here it is to be noted that this will emphatically and initially impact India’s exports and imports the most. This is mainly due to the fact that the Indian government has various vested interests in development projects in tourism and petroleum retail where it has humungous investments in Sri Lanka. Coupled with these two sectors, the Indian government’s interests are also vested in real estate, manufacturing, and financial services. Now given the strong crackdown by the Sri Lankan government, there is a high possibility that the situation might take a hit too.
According to various officials even though the imports of non-essential items are on a decline from India, the export of most essential items is still continuing. But what is actually aggravating the problem is that a lot of Indian exporters have already exported their rightful share and are now facing payment crunch and problems from Sri Lanka.
The detestable covid impact
It is to be noted that to some extent Sri Lanka’s economic woes have been exacerbated by the covid crisis in the economy. Given the increase in the covid cases, the tourism sector, which is the highest earner of the forex exchange has taken a massive hit. This has highly affected the primary source of foreign currency earnings for Sri Lanka.
The borrowings of Sri Lanka
It is to be noted that the price rise and declining forex exchange are not the only deterrents that are pestering the economic growth of Sri Lanka but its humongous borrowing is also a major contributor to the debacle. The kind of borrowings that the Sri Lankan government has undertaken in the last year, especially under the influence of China, is quite emphatic. Thus, to pay back all the dues is arduous and quite detestable.
Coupled with the borrowing debacle of the Sri Lankan economy, the economy had also shrunk by 3.6 per cent the last fiscal year. This also had led the Sri Lankan rupee to weaken by 7.5 per cent against the US dollar. Thus, given its current deplorable situation, it is quite arduous and ambiguous to decipher that what does the future of Sri Lanka holds.
Edited by Sanjana Simlai.