CRISIS IN SRI LANKA

KAKALI DAS

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Economic Crisis is the main reason for declaring the State of Emergency in Sri Lanka. Social media websites were banned. And a 36 hour police curfew had been declared in the island, which the Prime Minister has revoked late Tuesday night. Before this, thousands of people were out on the streets protesting. There’s a scarcity of fuel and food in the country. People are enraged, and Sri Lanka is going through a major economic crisis.

Let’s try to understand the reasons behind this.

In February, Sri Lanka’s foreign currency reserves were at a mere $2.3 billion. Compared to January 2020, it had fallen below 70%. If a country has a low foreign currency reserve, it is difficult for it to import goods. With the present level of foreign currency reserve in Sri Lanka, it can import goods to meet one month’s needs only. Apart from this, there is a debt payment of $4 million due from Sri Lanka.

In India, we think of imported goods as luxury items – imported phones, laptops, cars etc., but Sri Lanka’s economy relies on imported goods even for basic products such as, sugar, cereals, pharmaceuticals etc. Thankfully, India and India’s economy is so large that these basic products are products in India, and we can import it from different states, and not countries. But Sri Lanka has to import these from other countries. Because of the low foreign currency reserve, it has become increasingly difficult to import these. It has led to rapid inflation in the prices of these basic commodities in the country. In the last month alone, Sri Lanka witnessed 25% inflation. People are facing difficulties to purchase even the basic amenities – rice, sugar, milk.

“The final reason behind the economic crisis of Sri Lanka is, Foreign Debt. This isn’t a new problem. This has always been a problem for Sri Lanka historically. In 2017, Sri Lanka’s total debt was $64 billion. 95% of the government revenue, went to debt repayment. In 2020, the debt was at $51 billion, and Sri Lanka imposed an import ban on foreign currency to repay this debt.”

A Sri Lankan activist told The Indian Express, that the price of rice in Sri Lanka can reach up to 500 LKR within the week. Here, 1 INR = 4 LKR approximately. Today, rice is at LKR 290/kg, sugar LKR 290/kg, milk powder LKR 790 for 400 grams. In some restaurants, a cup of tea now costs LKR 100. 

A Sri Lankan school teacher has said, they are a family of 3. Their family’s monthly expense used to be LKR 30,000 per month. But last month, their expenses were at LKR 83,000. There’s a shortage in milk powder too. It is becoming difficult for people to afford rice and lentils. On top of it, there’s an electricity problem, a power crisis too, because fuel is also imported from other countries. People are getting electricity for only 4 hours a day. There are many power cuts. The Power Minister of Sri Lanka has directed the officials to turn off the street lights to save power.

The government has ordered the electricity board to get diesel from the Sri Lankan branch of Indian Oil Corporation, the Lankan Indian Oil Corporation (LIOC). LIOC has given 6,000 MT of diesel to Sri Lanka, so that there is some relief in the situation. Cooking gas is supplied only once a week. And the price of gas cylinder went up from LKR 3,000 to LKR 4,200. There are long queues outside fuel stations.

It has affected the newspaper and printing industries too. Newspapers have to minimise their prints. School exams have been postponed. Due to this severe food and economic crisis, people have started fleeing the country. The first set of six refugees was found on an island near Rameshwaram. They said that they had paid LKR 50,000 to the fisherman, to drop them off on an island in the Indian waters. These six refugees are a young couple, their 4-month old baby, another woman, with her 2 children. They were rescued by the Indian coast guard, and were fed in the coast guard camp. Later, they were handed over to the police, who then took them to a refugee camp. Then there was another group of 10 refugees who said that they had spent LKR 300,000, so that they could flee their country and reach India safely. Imagine how desperate the people have become!

According to the intelligence officers of Tamil Nadu, 2,000 refugees may come to India in the next few weeks. To discuss this, Tamil Nadu’s Chief Minister MK Stalin met PM Modi, asked permission to allow the State Government that the Sri Lankan Tamils that would come to Tamil Nadu as refugees can be given humanitarian aid by the State Government.

India is already supporting Sri Lanka in other ways as well. On 17^th March, Sri Lanka’s Finance Minister signed a Credit Line of $1 billion with New Delhi. Earlier in the year, a $500 million credit line was signed for fuel purchases. India did a currency swap of $400 million. And now, Sri Lanka is requesting another credit line of $1 billion from India, so that they can import basic items for their country, and the situation could be controlled a bit.

But India is not the only country, from whom Sri Lanka has asked for help. They approached China for help too. Sri Lanka is deep in China’s debt. The country had to make several debt repayments to China. Sri Lanka has requested China to restructure the debts. Along with it, they are discussing a $2.5 billion credit line from China. There have been discussions with IMF and the World Bank too. The President of Sri Lanka will go to Washington DC next month, so that they could work out a rescue plan, to save the country.

The latest update on the situation is the Prime Minister has revoked the curfew and the state of emergency in the country. All the ministers in the Sri Lankan government have resigned. The 26 ministers in the government have submitted their Letter of Resignation to the PM. But their PM, Mahindra Rajapaksa, and his brother, the President of the country, against whom people are protesting out on the streets, neither of them has resigned yet.

But, what are the reasons behind this pathetic condition of Sri Lanka now?

There are multiple reasons for this. In 2018, Sri Lanka was one of the world’s top destinations for tourism. Hundreds of thousands of foreign tourists visited this country. The year 2018, specifically, was a record-breaking year for Sri Lanka. 2.3 million foreign tourists visited Sri Lanka. About 12% to 13% of Sri Lanka’s economy, relied on tourism.

Then in April 2019, there were multiple bombings in the country. Now, known as the Easter Day Bombings. Three churches and three hotels were targeted across several cities, 269 people were killed in the bombings, 45 of them were foreign nationals. So, it can be understood why this one-day wrecked tourism. 8 suicide bombers were responsible for the bombings – Sri Lankan citizens, associated with a local Islamic terrorist group. Due to this, the following month, there was a large scale anti-Muslim violence in Sri Lanka. Homes, shops, cars of Muslims were attacked, and vandalised. To control this, more than 100 troops were deployed in Negombo town. Curfews were imposed, the government blocked Facebook and WhatsApp to stop the rumours. But, doing so only heightened the religious tensions. All these had a terrible effect on tourism.

But it was just the beginning. After this, in March 2020, the Covid-19 pandemic struck, shutting down tourism all around the world. As a huge percentage of the country’s economy relies on tourism, the entire sector collapsed. But even a collapse in tourism shouldn’t be able to cause this much damage. There are more reasons.

The government made mistakes too. The Sri Lankan President, Gotabaya Rajapaksa, won the election in 2019 and came into power. In the presidential campaign, he had promised to revive the economic growth in the country. Another promise was to cut down theValue Added Tax, VAT, to half. VAT used to be charged at 15% before this. The simple reason for the tax cut was that if people paid less tax, they would spend more. With the increase in consumption, there would be economic growth. There’s nothing wrong with the logic; this worked out successfully in many instances. But it needs to be executed with the right timing, right planning after understanding the situation. This tax cut came into effect on 1^st December 2019. 3 months later, the Covid-19 pandemic hit. The logic behind was that people would consume more with the reduction in tax, but with the lockdown, and people unable to go out to consume things, there was no increase in consumption, and hence none in economic growth either. And the government had to incur a huge revenue loss. Sri Lanka’s public debt kept on increasing. In 2019, the debt was 94% of GDP. By 2021, it had gone up to 119% of GDP.

Their President came up with a “Masterstroke” too. In 2019 election, he had promised that he would convert the country’s agriculture into organic. And then he came up with the sudden decision. Overnight, there was a nationwide ban on synthetic fertilisers and pesticides. He wanted the country, overnight, to become one that practices 100% organic agriculture. There was another reason to make this decision – to cut down imports and to save money. Synthetic fertilisers and pesticides were imported into the country. But these sudden, bold decisions are often without much thought. True change in the country happens slowly and with planning.

The organic food, undoubtedly, is good for the environment, our health, and is more sustainable, but when it comes to organic farming, its short-term efficiency isn’t good. It’s said that in the short term, the produce may fall by 20% to 30%, because of not using fertilizers and pesticides. This is exactly what has happened in the country.

Sri Lanka was a country that was self-sufficient in rice production. Rice did not have to be imported. But after the ban, within 6 months, the government had to spend $450 million to import rice. There was a large tea production in Sri Lanka, and tea used to be exported to other countries. A major source of foreign currency for the government was the tea export. The ban destroyed the tea crop too.

Organic farming is definitely better for your health, environment, but any decision, irrespective of how good the intention behind it is, if it is made without thinking it through, without planning for it, it would lead to such a catastrophic result. For an instance, take Sikkim as an example. In India, Sikkim is a 100% organic state. Sikkim transitioned into being 100% organic after long deliberation. They began in 2003, and in 2016, they had declared that Sikkim had become a 100% organic state. In the short term, their production capacity dropped in some areas, but in the long term, it is seen that there isn’t a significant difference in the production. In fact, this gave a boost to Sikkim’s tourism too.

The final reason behind the economic crisis of Sri Lanka is, Foreign Debt. This isn’t a new problem. This has always been a problem for Sri Lanka historically. In 2017, Sri Lanka’s total debt was $64 billion. 95% of the government revenue, went to debt repayment. In 2020, the debt was at $51 billion, and Sri Lanka imposed an import ban on foreign currency to repay this debt.

Due to these reasons, the value of the Sri Lankan rupee is deteriorating rapidly. At the beginning of March, $1 was approximately about LKR 200. Now, the conversion rate has dropped to $1 being about LKR 300. Because the value of their currency is falling, everything that they import are becoming more and more expensive. This, in turn, is causing more inflation. 

Hope that the credit line been given to Sri Lanka would help the country to make a successful recovery, an d would be able to revive its economy back on track. For any country, crisis and instability is obvious for its citizens, but it leaves an impact on the neighbouring countries too. If the situation in Sri Lanka continues to worsen, there will be more refugees in India. There may be several effects of this on India as well.

Headline pic: https://www.wionews.com/