April 2, 2022 - 11:54 am

Sri Lanka Has Declared A State Of Emergency

     Sri Lanka has declared a state of emergency giving sweeping powers to security forces. President Gotabaya Rajapaksa invoked the tough law a day after hundreds tried to storm his house in anger over an unprecedented economic crisis. The President’s decision from 2020 to restrict imports, including of food items and inputs into agriculture, was aimed at conserving foreign exchange. Driven by that logic, he banned chemical fertilizer imports in May 2021, forcing the country to switch abruptly to organic farming. The move is now posing a serious threat to Sri Lanka’s food security.

     People in Sri Lanka are facing 16-hour power outages, the country has run out of food and fuel, inflation has reached a staggering height, non-emergency surgeries have been cancelled and even medicines are in short supply. Sri Lanka is in a deep economic mess with a mounting foreign debt, huge trade deficit and a foreign exchange reserve that has fallen from $7.6 billion in 2019 to $2.6 billion in 2022. While the scale of Sri Lanka’s economic woes is truly humongous, there is a tendency across the world to use a geopolitical frame to understand this and announce China as default culprit. Well, China is indeed responsible for many problems in the country but the real reason for this mess is Sri Lanka’s own wrongdoings.

     Sri Lanka has a shortage of essential items due to a lack of enough foreign exchange reserves to pay for it. It could have easily borrowed from the capital market like it has been doing from past many years. Only this time, Sri Lanka’s credit ratings have been downgraded and it can’t roll over its sovereign debt any more. Sri Lanka’s total debt is 119 per cent of its GDP, of which sovereign bonds make up the maximum share of 40 per cent. In comparison, the debt that it owes to China is just 10 per cent.

     The real problem with Sri Lanka goes back to the end of the civil war in 2009. In 1977, Sri Lanka opened up the country to neo-liberal reforms but due to the onset of a 26-year-long civil war, the country was not able to focus on its economy. Even after the end of the civil war, Sri Lanka committed huge mistakes by taking economically imprudent decisions including a failure to implement a progressive tax regime, huge dependence on commercial borrowing to fund budget deficits and a failure to diversify and grow its export market.

     Its Tax-to-GDP ratio fell to 8.4 per cent in 2020 from 18 per cent in 1990-1992. Due to falling revenues and a lack of public investment in key infrastructure, Sri Lanka became susceptible to foreign elements whose terms of business were always predatory in nature. But as the dominance of sovereign debts in Sri Lanka’s debt burden shows, China was just one of the actors and that too a minor one.

    Another suicidal blow to Sri Lanka’s economy came from its failure to diversify export basket and look for newer export markets. Diversified export basket and a multitude of options for export markets is a very South Asian problem, to be honest. It is only now that countries such as India and Bangladesh are also focusing on the same. But in the case of Sri Lanka, problem is much more serious. Since 2009, Sri Lanka has failed to integrate with the global market with exports’ share in GDP falling to 12 per cent from 33 per cent in 2000. Imports and exports as a percentage of GDP, declined from nearly 80 per cent to 45 per cent between 2005 and 2015.

      It may be simplistic to summarise the causative factors behind the crisis as excessive borrowings at high interest rates and a putative ‘Chinese debt trap’. However, there is behind it a tale of economic mismanagement, profligate use of public resources, and possible mishandling of monetary policy. Sri Lanka, an island nation heavily dependent on imports, gains its foreign exchange through tourism, the export of garments and tea, besides external remittances. If the Easter Sunday blasts of 2019 set back its tourism sector, the novel coronavirus pandemic almost finished it off. The heavy-handed lockdown, overseen by a military-led task force, had severe economic consequences too, as livelihoods were lost, while earnings suffered. The country needs measures to shore up its foreign exchange reserves and the balance of payment position. India has extended assistance amounting to $2.40 billion, and China is also looking at further loans. The country’s past resistance to borrowing from the IMF may not last, and it may have to accept significant conditionalities for a bailout package

     The drivers of Sri Lankan economy itself, imprudence of its leaders, their failure to execute a sound economic policy are to be blamed. China only made use of Sri Lanka’s situation. There is no denial here that China has a preference for such imprudent leaders and messed up economies where it can extract geopolitical advantages by extending “cheap debts”. But the current crisis has roots in Sri Lanka’s own distorted economic policies. However, advocating that the people tighten their belts and suffer a little more may not work. The President should acknowledge both the depth of the crisis and the rising public disenchantment. What his country needs is empathetic leadership and decisive measures to halt the downward spiral.

Questions and Answers Questions and Answers

Question : What was the aim of the President's decision to restrict imports of food items and inputs into agriculture?
Answers : Conserving foreign exchange
Question : What did Sri Lanka switch abruptly to in 2021?
Answers : Organic farming
Question : What was Sri Lanka's foreign exchange reserve in 2019?
Answers : $7.6 billion
Question : What has Sri Lanka been downgraded?
Answers : Credit ratings
Question : How much of Sri Lanka's GDP is Sri Lanka's debt?
Answers : 119 per cent
Question : In what year did Sri Lanka fail to integrate with the global market?
Answers : 2009
Question : How long was the civil war that Sri Lanka was not able to focus on its economy?
Answers : 26 year long
Question : How much did Sri Lanka's Tax to GDP ratio fall to in 2020?
Answers : 8.4 per cent
Question : Why did Sri Lanka become susceptible to foreign elements whose terms of business were always predatory in nature?
Answers : Falling revenues and a lack of public investment in key infrastructure
Question : What country was one of the actors in Sri Lanka s debt burden?
Answers : China
Question : What did Sri Lanka fail to do to its economy?
Answers : Diversify export basket and look for newer export markets
Question : What percentage of Sri Lanka's GDP did imports and exports decline from 2005 to 2015?
Answers : 80 per cent to 45 per cent
Question : What are some of the reasons for Sri Lanka's crisis?
Answers : Excessive borrowings at high interest rates and a putative Chinese debt