What pushed Sri Lanka into an Economic Crisis?
Our Sri Lankan neighbours are suffering from all-time high retail inflation of 17.5% and food inflation of over 25% in March 2022. Exams got canceled because of the paper shortage. Daily 13-hour power cuts. No employment. High Petrol prices. And, the list is not ending. But, what fueled this Economic crisis? Let's first understand how Sri Lanka was functioning in the past decades.
Dictatorship of Rajapaksa Government
All the key ministries that make or break an economy are headed by the members of the Rajapaksa family. Be it, President, Prime Minister, Finance Minister or Agriculture. Most of these ministers misused their power with poor decision-making and corruption. So, the country’s economic conditions and the future were dominated by the whims and wishes of a particular family.
Civil War
There was a civil war going on in 1983 between the majority population of Sinhalese and the minority population of Sri Lankan Tamils. This war ended in 2009 but it burned the resources of the government which could have been used for development. Also, during this period, the country was least attractive for foreign investments.
Non-diversification in Exports
The Country earned 90% of its exports revenue from rubber, tea and coconut since 1948. This export revenue took a major hit when international prices of tea and rubber dropped in the 1950s. But, the government did not focus on development or making the economy self-sufficient and was still heavily dependent on imports for paper, fertilizers, oils, electronics, etc. So, where did the budget money go? Most of it went to the pockets of ministers in spite of the forex crisis.
Huge Foreign Loans
To meet the difference between excess expenditure over revenue, the country started taking foreign loans. IMF has given 16 times financial assistance to the country. Being a low-income country, most of its loans were carrying high-interest rates. Not so surprising, because of this most of its revenue went into paying debt and not development. So, the country was in this vicious loop. Still ignoring the red flags, the Lankan Ministry decided to develop the Hambantota port. It took this development proposal to India and US and was rejected by both due to zero profitability of the project. But, guess who decided to give funds? China.
Enter China
China knew that Sri Lanka could never pay back its loan. Still, it gave $1 Billion at an atrocious rate of 6%. Not only that, it laid conditions that the development must be carried out by a Chinese company only. So, technically all the money was flowing back into China and no employment was generated for the Lankan people. As evident, the government defaulted its loan repayment, and now, China has taken the same port on lease from Sri Lanka for 99 years at a cheap price and would now get all the strategic advantages of this port.
Some Bad Decisions
In 2019, Gotabaya Rajapaksa announced a 30% tax cut. Less tax revenue for an already ailing budget. The government decided to shift to 100% organic farming and banned the import of fertilzers. This hurdled the farmers who were not ready for this shift and soon went on protest. This resulted in food shortage and food hoarding which ultimately raised inflation. This step also impacted exports of tea which depleted foreign reserves.
Conclusion
So, the country was on a clear-cut path to a crisis but the covid pandemic preponed this by a few years as this country was a favorite tourist destination. There were also regional riots in various parts of the country which further shunned the tourists. Again, less foreign revenue. India has offered a credit line of $1 billion to its neighbour to meet the requirement of essential commodities and the protests are going on to dethrone the Rajapaksa family. Well, now the country is in the hands of people and India is with them in all good spirits.