Emergency in Sri Lanka

What is the issue?

President Gotabaya Rajapaksa declared a state of Emergency in Sri Lanka after the public resentment due to a sharp economic downturn.

War time effects- During the period of the war, budget deficits were high.
The capital flight that accompanied the global financial crisis of 2008 drained Sri Lanka’s foreign exchange reserves.
The IMF loan in 2009 was obtained with the conditionality that budget deficits would be reduced to 5% of the GDP by 2011.
Post war growth- Sri Lanka’s post-war GDP growth was reasonably high at 8-9% per annum between 2009 and 2012.
The economy was on a downward spiral after 2013 as global commodity prices fell, exports slowed down and imports rose.
The government approached the IMF in 2016 for another 1.5 billion dollar loan with conditionality for a three-year period between 2016 and 2019.
The IMF package led to a deterioration of Sri Lanka’s economic health where GDP growth rates shrank to 2.9% in 2019.
Investment rate and savings rate fell, government revenues shrank and government debts rose.
New shocks
- The Easter Sunday bombings of 2019 deterred tourists
- The pandemic since early 2020 drained the economy
- The government’s tax revenue was cut substantially
- The “organic only” agricultural policy (chemical fertiliser ban has been rolled back) impacted the food security
The current Sri Lankan economic crisis, then, is the product of
- the historical imbalances in the economic structure
- the IMF’s loan-related conditionalities
- misguided policies of authoritarian rulers and
- the official embrace of pseudo-science

The long-simmering crisis came into limelight during 2021 food emergency, when supplies were badly affected.
It was soon followed by fears of a sovereign default in late 2021, which Sri Lanka prevented.
The island continued facing severe shortage of essentials from fuel, cooking gas, and staple food grains to medicines.
The fuel shortage has led to long blackouts (upto 13 hours) across the island.
The value of the Sri Lankan rupee has dropped to 300 against a U.S. dollar putting importers in a difficult spot.
The COVID-induced salary cuts and job losses and the rising living costs have brought more agony.
Batches of Sri Lankan Tamils arrived on the Rameswaram coast trying to escape a dire situation in Sri Lanka posing a risk for refugee crisis.
Sri Lankans are in anger, going by public demonstrations and protests and want the President to step down immediately.

India has extended 2.4 billion dollars this year to help the country reel out from the crisis.
China is considering a fresh request from Colombo for 2.5 billion dollars assistance, in addition to the 2.8 billion dollars it has extended since the pandemic broke out.
The government has decided to negotiate an International Monetary Fund programme, while seeking support from other multilateral and bilateral sources.

References