Current Affairs 2022: Public Emergency in Sri Lanka

By Yash Singhal

Despite warnings from the IMF, Sri Lanka kept printing more notes instead of increasing taxes, plunging the country into its deepest economic crisis ever. 

Sri Lankan President Gotabaya Rajapaksa has declared a state of emergency in the island nation. The announcement gives the security forces the authority to arrest suspects with immediate effect. The extreme move came after hundreds of protesters started agitating in the capital and some even stormed the President’s residence. The public is blaming the government for poor management of economic policies that have dragged the country into a big mess. 
Sri Lanka is experiencing its worst economic crisis since gaining independence from the United Kingdom in 1948. A few battlegrounds Sri Lanka faces are a skyrocketing inflation rate, power outages that last 14-15 hours per day, and the lack of gasoline to keep the economy going. Is this crisis, however, the result of natural causes or has it been induced by political actors in order to gain political mileage?

Politics & Planning Gone Wrong in Sri Lanka:

The political games played by each country differ, and Sri Lanka is no exception. In order to win over the opposition candidate, Gotabaya Rajapaksa promised a variety of tax cuts, if he were elected president, which he has since implemented. In 2019, Rajapaksa dropped a variety of taxes to about half their previous levels or to zero, with one of the most significant tax reductions being the reduction of VAT on gasoline. In addition, the government raised the threshold limit for tax-free status, which resulted in a reduction of nearly one-third of the total number of taxpayers in the country. A result of this was that the government reserves deteriorated even further due to government expenses.

Despite recommendations from the International Monetary Fund (IMF) to refrain from printing money and instead raise interest rates and taxes while cutting spending, the Central Bank kept printing money in unprecedented quantities. The IMF had even warned of economic collapse if the government continues to print money.

Foreign exchange reserves are essential to keep the economy functioning and GDP growing. In 2010, the government began borrowing money to increase their foreign exchange reserves, rather than increasing them through taxation. It overlooked the fact that loans can only temporarily increase reserve levels, and that, in the case of loans, they must also pay interest, which will erode reserves over time. In order to compensate for this, loans against the GDP grew from 85 percent in 2019 to 105 percent in 2021.
Because of high debt obligations, Sri Lanka has already lost its important port to China, but the government hasn't responded more sensitively to the issue of increasing foreign exchange reserves through loans. During the pandemic, when the world was subjected to severe lockdowns, Sri Lanka's exports decreased, posing a threat to the country's operations. As a result, almost all of Sri Lanka's foreign exchange reserves were depleted over that period. According to the most recent announcement by the governor of the Central Bank of Sri Lanka, the government has approximately $2 billion in foreign exchange reserves. Consequently, two governors were replaced in the span of two days.

Impact of Economic Crisis in Sri Lanka:

Many schools in Sri Lanka declared in March this year that their term/mid-year tests would be postponed indefinitely due to widespread paper shortages across the country, which were mostly caused by a lack of foreign reserves to import paper. Inflation was 17.5 percent in February 2022, according to official figures. The inflation rate for food increased by 24.7 percent year on year, while the rate for non-food items increased by 11 percent. In the period February 2021 to February 2022, the price of local red chilis increased by 60%, local potatoes increased by 74.8 percent, and local Nadu rice increased by 64%.
Sri Lankan Tourism and Economy:
Sri Lanka, has been known as the "Pearl of the Indian Ocean.". Because of its strategic location and favourable weather conditions, it is a popular tourist destination in the world. People travel from across the globe to Sri Lanka to enjoy the country's natural beauty. Hence, tourism contributes approximately 10% to the country's gross domestic product (GDP).
But in March 2022, the governments of the United Kingdom and Canada issued a warning to their citizens travelling to Sri Lanka about the current economic situation in the country. It came as a big hit to Sri Lanka as the UK is its third-largest source of tourists after India & Russia.

Possible Solution to Sri Lanka's Economic Crisis:

Despite the fact that the country is in the middle of a pool, getting out is a little difficult, and most of the effects will fall on the general public. In order to find a way out of this crisis, both the government and the public must work together responsibly. Even the rest of the world is rooting for Sri Lanka to find a way out of this mess. India has committed a total of approximately $2.5 billion to assist its neighbour during the worst phase of the conflict. India has also committed to providing assistance in the form of medicines and food grains to help the country cope with these difficult times. In December, China agreed to a 10-billion-yuan swap agreement with Sri Lanka in order to assist the island nation in alleviating its economic crisis. 
In order to combat this, the Sri Lankan government must change the economic structure of the country, which will take time. Once the situation improves, it is necessary to place an increasing amount of emphasis on the digital economy. According to the World Bank, Sri Lanka's telecom sector is already producing 32 percent more than it was prior to the pandemic, while its information-technology sector has grown by 20 percent and its financial services sector has grown by 28 percent since the outbreak. If we look at it from this perspective, Sri Lanka has a bright future in the development of digital technology and services.

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