Written by Vidushi Lakhera
Research Intern, Jindal Centre for the Global South,
O.P. Jindal Global University, India.
22jsia-vlakhera@jgu.edu.in
The South Asia region which has historically been colonized for decades by Imperialist powers like Britain, France and Portuguese, who plundered the wealth of these Nations to maintain their hegemony and economic stability. Leaving south Asian nations with multiple challenges like Poverty, Wide- spread corruption and climate issues. However, since the global pandemic, the south Asian countries have been beset with economic challenges, following a Military Coup in 2021, Myanmar is dealing with a major humanitarian crisis involving exodus of Minority Rohingyas and Food security issues. Pakistan Economy is in shambles with dwindling Foreign Reserves and imbalance of Balance of Payment, Nepal experienced political upheaval in 2021, which resulted in the dissolution of the Parliament, and the country’s foreign remittances is declining rapidly. Afghanistan which is under the grip of Taliban is too facing economic challenges with millions of people having no access to food and medical facilities. Despite having the world’s fourth largest economy, India is experiencing an increase in unemployment, but Sri Lanka represents the most contemporary example of the worst Economic Crisis in the region. (Bhowmick, 2022 a)
Sri Lanka a small Island Nation in South Asia Region is grappling with the worst economic and political crises since its Independence in 1948, The 26 years of violent civil war which has had a massive effect on the Lanka’s economy, the civil- war requirement has had kept country’s fiscal deficit high, as country was spending its resources on military and the 2008 global Financial crisis further deteriorated the economic situation leading to fall in the foreign reserve of the island nation, Post- Civil war the government sought IMF help to rejuvenate country’s economy and Sri Lanka did witnessed the growth of 7.6% in the period of 2010 to 2012. (Delgado, 2014) but the current crisis is worse than that, as it has impacted the lives of ordinary Sri Lankans, as they lack access to basic amenities such as food, Fuel and medicine (htt2). The Rajapaksa’s overnight decision to ban import of fertilizers and implement organic farming techniques has been disastrous for the rice sector, Rice is the staple food of 21.8 million and is the livelihood of more than 1.8 million farmers. (htt2) and has led to food insecurity in the country. As Sri- Lanka has gone a long way from being a self-sufficient nation by exporting $8.41m rice in 2020 to importing rice from India on credit. (OEC, n.d.) In essence, the Sri Lankans are bearing the brunt of disastrous Economic and foreign policies Implemented by the autocratic leadership of the country. (BHOWMICK, 2022 b).
IMPACT OF THE ECONOMIC CRISIS ON TOURISM SECTOR
After the civil war ended, Sri- Lanka witnessed a large influx of International Tourists, which created employment opportunities for Lankans and led to an increase in the Foreign Reserve of the country. And this sector became the major driving source of the economy and accounts for 5% of the GDP. (Sri Lanka Economic Crisis: Lucrative Tourism Industry Bears Major Brunt, 2022) After post war, there was a surge in tourists every year, in 2018 Tourism earned Sri-Lanka $4.4 billion and contributed to 5.6 % of the GDP. The incidence of Easter Bombing in 2019 in Colombo which lead to decline in tourism by 70% in May and 60% in June compared to 2018 statics, but the final nail in the coffin was the pandemic 2020, which brought world to standstill and Island nation was no exception, and it resulted in deep steep in the number of International Tourist and tourism sector contribution to the GDP was merely 0.8 % in the 2020. (Bhowmick, 2022 a). The invasion of Ukraine by Russia in 2022 was also one of the major factors which exacerbated Lankan economy which was already reeling under the pressure causing steep decline in Foreign tourists and the sharp increase in the prices of oil and fuel made the situation worse leading to shortage of fuel and oil in the country and bringing hotel and other industries to halt. Tourism sector is one the most vital sectors of Sri – Lanka’s economy as it generates foreign reserves but the steep decline of the tourism sector due to a number of interconnected and combined factors has had a disastrous effect on Sri- Lanka’s economy. (Bhowmick, 2022 a)
The Negative Impact of Sri-Lanka Government’s Domestic Policy on the Country
The brutal civil war that ravaged Sri Lanka for 26 years, costing about $200 billion, had a significant impact on its infrastructure, environment and economy. It was followed by economic mismanagement by the successive governments of Rajapaksa and Sirisena. (Tilakaratne, 2013) which caused twin challenges: shortfall of budget and balance of payment deficit. The country’s rising external debts due to government unnecessary infrastructure projects like building of Hambantota port and with increase in government’s spending to implement COVID 19 relief measures have structurally deteriorated the country’s economy.
Following the 2019 land- sliding victory, the former President Gotabaya Rajapaksa brought changes in the taxation system of the country by enacting significant tax cuts towards the end of 2019, in- order to fulfil his electoral promise and please his voting community, which resulted in loss of approximately one million taxpayers between 2020 and 2022. This step impacted the economy already plagued by widespread tax evasion by the elite class of the society. He then proposed the 10 years vision of the nation’s transition into completely organic farming. However, In April 2021 his populist government decided to ban import of fertilizers to promote sustainable agriculture system and this was also a pre-emptive measure to keep check on Sri Lanka rapidly dwindling reserves of foreign currencies from numerous imports at that time, but the overnight shift to organic farming, proved very costly for the economy as the production of rice fell by 20% in a matter of months, leaving nearly 33% of agricultural land idle and raising rice prices by 50% in just seven months. (Bhowmick, 2022 a) This hampered the economy’s self-sufficiency in rice production, and the country was forced to import from other countries in order to avert a food crisis. The country’s agriculture export profit fell by 2.1 percent in February 2022 compared to 2021, owing to lower income from products like sugar and tea and other commodities and imports of milk powder, rice and wheat from other countries. (Bhowmick, 2022 a) This mindless decision of the Rajapaksa government to shift into organic farming affected the most flourishing industry of the economy, that was the tea industry which accounted for US$4.1 billion revenue before the crisis. And the total output of this industry accounted for 300 million kilograms per annum and was the largest producer of the orthodox tea and exporting 95% of its production. This was yet another reason for decline in foreign reserves of the nation. (Krishnan, 2022)
BORROWINGS FROM CHINA
The other prominent reason for Sri-Lanka’s economic downturn was excessive borrowings from other nations and various multilateral organizations, Beijing emerged as the prominent partner post-civil war and started investing in infrastructure and when Sri Lankan government proposed numerous projects for the economic revival of the country, China with its deep pockets seized the opportunity and funded these projects through loans and other measures. Regrettably Sri- Lanka got stuck in so-called debt diplomacy by China and when it was unable to pay loan on time, Beijing captured the assets of the nation and the latest example of this policy is Hambantota port which was leased out to China for 99 years. While China accounts for 9.83% (US$3.4 billion) of Sri Lanka’s total foreign debt as of 2019. China is undeniably the other factor which caused havoc in the nation along with the corrupt Rajapaksa government. (BHOWMICK, 2022 b).
INDIA’S ASSISTANCE TO SRI- LANKA
India, following the policy of neighbourhood first stood with its Island friend during its worst time in its history by providing a much-needed lifeline to the economy by extending credit lines worth$ 1.55 billion for fuel, food, fertilizers and medicines and emerged as a trusted and reliable friend. India Extended $400 million currency swap with Sri-Lanka, while deferring another $500 million due for settlement to the Asian clearing union (ACU) in January 2022. India even provided a credit line to import fertilizers, an essential aid to the farming community during harvesting season. Apart from all these India has requested International Monterey to grant loan to Sri- Lanka to overcome unprecedented economic crisis. (India rushes food, medicine to bankrupt Sri Lanka, 2022)
ROAD AHEAD FOR SRI- LANKA’S ECONOMIC RECOVERY
Sri- Lanka’s economic problem is structural and it goes back to date when it got independence. The Political parties came to power by promising: subsidies on rice, cheap bread, free fertilizers and lower taxes. This has had a knock-on impact on government revenues, resulting in decades of fiscal deficits, rising government borrowing, and printing money, leading to a low but consistent inflation rate. Its economy is basically experiencing twin deficits (government spending exceeds its revenue). Sri-Lanka needs an extensive reform for its long-term sustainable growth in order to cater its existing debt and come out stronger from this crisis. A stable monetary policy is essential for maintaining macroeconomic stability and trust in the local currency. The new government needs to implement progressive taxation system to generate revenue and it needs to bolster its tea industry which was flourishing earlier and the Central Bank of Sri- Lanka should be allowed to function independently in order to make right decisions without any political influence Though the road ahead for economic recovery is long but with the stable economic policy and foreign policy, Sri-Lanka can be on the path of development. (Aberrate, 2022)
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The opinions expressed in this article are those of the author (s). They do not purport to reflect the opinions or views of the Jindal Centre for the Global South or its members.
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