Sri Lankan Economic Crisis of 2022
Muhammed Rayhaan | August 10th, 2022
Source: FormulaIASBlog
Introduction
2022 has had its fair share of its event that spread like wildfire across the entire world. From Russia’s Special Military Operation to Stock Market Crashes in May, it took caught people off guard and the international economic community took a setback. One of these pressing events has to be without a doubt, the Sri Lankan Economic Crisis.
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Sri Lanka has decorated the news for a while along the past couple of weeks, infamously known for a series of violent protests starting at Colombo, the capital, A ruthless ex-prime minister, who used all of his disposable power to curb them down and finally who ended up resigning, budging to the thousands of people outside his office. This is known to be Sri Lanka’s worst economic crisis ever since its independence in 1948.
Why did its economy tumble?
Sri Lanka, despite being well hidden in the economy in the world, is not considered economically stable by many analysts, owing to the fact that it is a country in crippling debt. Sri Lanka had about $8.6 billion in debt to be repaid by 2022, says Bloomberg. Though totally, the external debts added up to $51 Billion, the government had a comparatively meagre $2 Billion in its treasury. This pushed the island into its first ever sovereign default, as declared in June this year.
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Apart from the debt, Sri Lanka never had an appeasing policy for its money management. Tax Cuts and Money Creation contributed heavily to the crisis. We also have several incidents like the Easter Bombing in 2019, and of course, the novel Coronavirus.
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External debts were undoubtedly the biggest contribution to the issue. With its contribution to the GDP raising from 42% in 2019 to 119% 2021, the country was already deep enough into an economic derail for several years, with enough damage done, it became incorrigible.
What did it take away with it?
As the economy collapsed, it took down several essentials with it, pushing the country into the dire situation it is in today. Power cuts and food shortages became common. Fuel and medicines too couldn’t make their way to the consumer, if actually it made it out of the production line.
Common yet important events like mid-term examinations in schools and scheduled surgeries at hospitals were all postponed indefinitely in light of the shortage of resources to run the same.
With crashing commodities, the economy slowly worsened. Inflation went as high as 54%, chilis and rice booked it above 60% and potatoes went as high as 75%. The Sri Lankan Rupee plummeted to an all time low, trading at around Rs. 355 for 1 US Dollar in Mid-April.
What was the Government Doing?
The Government that came into power in 2015 realized that the situation was dire, before it became obvious to the lay man globally. A handful of economic policies came to the country to set it back to the right track, but the coalition government failed to pass any of them.
The Government did not pay too much heed to any of the warnings or intimations from financial institutions and analysts, if they ever recognized. Reducing fiscal risks of SOEs and increasing the VAT from 11 to 15%, as well as several other reforms were made, but they all were reversed as the 2019 elections approached. Bad financial decisions were also made during said elections, to remain in power.
How did the citizens react?
The Country went into absolute turmoil. People took the streets of Colombo forcing the PM to resign at the instant. The political opposition staged many processions, asking the ruling government to step down in order to solve the crisis.
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By Mid-April, many cabinet ministers resigned. In May, the PM Rajapaksa’s house was set on fire, finally leading him to step down, but his brother Gotabaya refused to do the same and stayed as President, further fueling the protests
Conclusion
Despite having a new administration head, the country still fails to set its economy in order. It received help from the international community, such as a $1 billion loan from India, and emergency rice export from Chennai to Sri Lanka, as per the order of the CM of Tamil Nadu, MK Stalin, but none of this helped the situation
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Sri Lanka continues to suffer and will continue until its debt trap is solved. The new government seems to have calmed down the population a little bit, but several bad decisions in the past and the gigantic debt the island carries on its shoulders continue to weigh it down, with the light at the end of the tunnel not to be seen any time soon.