Reasons and Probable Solutions for Sri Lankan Crisis

Sri Lankan Crisis is known to everyone. A state of Emergency and curfew has been declared by the government in the country. All social media has been banned as of date, the situation is so bad due to food, fuel, commodities shortage that there are power cuts, examinations have been postponed, prices of food commodities have soared with thousands on the streets protesting against the current government.

Current Situation of Economic Crisis in Sri Lanka

Let us first closely look at the current situation of Sri Lanka. In the month of January, the foreign currency reserves of Sri Lanka was $2.3 billion as compared to $779 million in February 2021, a 70% drop within a year time frame. Other than this, Sri Lanka has a debt payment of $4 billion this year.

Note: For any country to buy and sell goods, especially to import goods from outside, it is important to have foreign reserves. Mostly it is in US dollars, earlier countries used to trade in gold but then it was changed to US dollars since the time of World Wars. In Sri Lanka’s situation, they only have one month’s foreign currency reserves left for importing goods.

Sri Lanka being a much smaller country has to rely on imported good to meet the daily demands of people. Products like cereal, sugar, pharmaceuticals are the basic goods that are imported at a large scale in Sri Lanka. Due to high demand and less supply, the prices of such commodities have increased within the country. The inflation is all time high in Sri Lanka, within a month the inflation has increased by 25%.

There is also power cuts within the country. On average, power supply is available for 4-5 hours in a day. Recently, Power Minister of Sri Lanka has ordered to switch off the street lights due to shortage of electricity. Not only this, the supply of cooking gas has also decreased and prices have gone high.

GDP of Sri Lanka

Sri Lanka’s GDP is marginally dependent on tourism, around 12-13% of the whole GDP comes from Tourism and Hospitality sector. It is one of the favorite destinations in the world for travelers, year 2019 saw the highest number of people travelling to Sri Lanka but then of course came COVID-19 and things had to shut down. Roughly 15% of the economy was all gone for the longest time, things have still not improved for Sri Lanka.

Secondly, mismanagement from the government was also a big reason. Taxes are the biggest source of revenue for any government. VAT (a type of tax) was reduced from 15% to 8% with the objective of increasing the spending of people, it helps in accelerating the economy but due to pandemic, the whole objective became purposeless. Whatever the government was earning from the taxes, that also has reduced, leading to losses for the Sri Lankan government. It was a good step but again the timing was wrong.

The next bizarre move taken by the government was going full-fledged organic in the agricultural sector. Going organic is a good thing, but excess usage of chemical fertilizers, insecticides and pesticides is not something that is good for health in the long run but what surprised everyone was that the government banned it in the whole country. Rice is staple crop in Sri Lanka but due to organic farming, which results in almost 30% less yield from organic farming, led to the shortage of staple crops like rice and had to import even rice for that matter.

Last but not the least Sri Lanka took too much loan from China that they could never repay. The Chinese Government had taken up the project of establishing a port in Sri Lanka. It is called the Hambantota International Port and for this, China had invested $1.3 billion which Sri Lanka could not repay. To repay the amount, Sri Lanka had to privatize the port and it was bought by a Chinese Company China Merchants Port Holdings Co. Ltd. For a 70% stake.

All these factors led to the downfall of the current government with people losing the trust in the government too. Corruption practices are also common by the current government (as stated by the locals).

How can Sri Lanka re-establish from the Economic Crisis?

1. The first thing they should do is to bring back the old tax system. They need to reverse back to taxes from 8% to 15% in order to have some money in the treasury of the Government.

2. They need to re-instate the usage of fertilizers, pesticides and insecticides and work on a model as to how they can assure that excess of fertilizers is not used into the growth of crops. To grow plans organically, a full plan has to be created and they cannot simply stop the usage of fertilizers. They should start from one sector of crops and slowly move further into the process.

3. Sometimes inflation also increases when crop mafia are hoarding the crops. They do this to increase the demand of a particular commodity and supply in less amounts, leading to an increase in the price of the goods. Similar situation happened into the Farm Bill of 2020 in India where anyone can hoard the crops. Thankfully the Act has again gone back into consideration and amendments by the Indian Government.

4. Open Sri Lanka for tourism again. This is an important step to boost the economy again. They should allow more countries to give Visa on Arrival and make the process hassle free, just like what Thailand does. Thailand’s economy too is dependent on Tourism and Hospitality and they have been doing it effectively from a long time. COVID-19 measures should also be taken for the safety of common man of the country.

5. Investing in renewable resources of energy. Since Sri Lanka is an island and there is plenty of tidal and wind energy, they should establish alternative sources of energy so that basic things like street lights and traffic signals are in use. This can prevent accidents on roads in the long run.

Final Words

India faced a very similar situation in 1991, same as Sri Lanka today, they had only about $1.2billion of foreign exchange reserves left to run the whole country (barely enough to last for 3 weeks of essential imports and only weeks away from defaulting on external debt). Manmohan Singh (an Economist) was appointed as the finance minister. He immediately got an IMF bailout to prevent the country from bankruptcy and made huge economic reforms. It was when Privatization, Liberalization and Globalization happened in India, inviting companies to start investing into India.

The huge economic reforms made by the farsighted economist Manmohan Singh brought India from $1.2 billion in 1991 to $600 billion foreign reserves as of now. Sri Lanka too needs an Economist to hold the position of the finance minister to overcome this extreme economic situation. And they should make key economic reforms immediately while seeking an immediate IMF bailout.

Pandemic has affected even the biggest and largest economies. The US is suffering from inflation, markets are down everywhere. A situation like this was inevitable. When bigger countries are suffering this much, small nations with unsustainable environment did not not escape from the wrath.

It is important for the people in every nation to cut costs and increase the savings. Given the current situation, investments especially in stocks might not be the best option for now. Let us wait and see when things would come back to normal.