Crisis in Sri Lanka!

Sri Lanka is an island country in South Asia. It lies in the Indian Ocean, southwest of the Bay of Bengal, and southeast of the Arabian Sea. The Sri Lankan economy has been struggling under the weight of its own debt for several years, even before the pandemic struck, and now the government has declared an economic emergency. Severe foreign exchange crises, looming debt repayments, depreciating currency, alarming depletion of foreign reserves, shortage of food and medicines, skyrocketing prices and an “extraordinary period of disruption” due to extended COVID-19 lockdown are some of the factors that contributed to this current crisis situation.

Revenue from tourism has fallen to about $2 million a month this year, from more than $450 million two years ago, according to data from Trading Economics. Forex reserves dropped from $7.5 billion in 2019 to around $2.8 billion in July this year. For those wondering what forex reserves are, foreign exchange reserves are important assets held by the central bank in foreign currencies as reserves. They are commonly used to support the exchange rate and set monetary policy. The value of the Sri Lankan rupee has decreased by approximately 8% in 2021, and this depletion has meant that the amount of money Sri Lanka has had to pay to import goods has drastically risen. Indeed, as the country relies on imports for food, this has meant that fewer imports are leading to huge increases in food prices.

Furthermore, the country faces the problem of repaying $1.5 billion of debt. These payments are in part responsible for the crisis. In July, Sri Lanka paid off a $1 billion debt repayment from its forex reserves. Another reason is the banning of chemical fertilizers. While this decision was environmentally beneficial it has led to a slowdown in food production within the country. The government also has implemented measures such as a food cost cap and has brought in the military to apprehend any people who are hoarding food and to handle rationing.

However, these measures may have adverse effects. For example, the food cost cap means that the quantity demanded is a lot higher than the supply at the fixed price. This causes a shortage as can be seen currently where people are lining up in long queues to buy necessities. Military intervention has consequences as well. When goods are seized from traders there is less incentive for them to bring in more supplies. This could further worsen the ongoing shortage.

In conclusion, the restorative measures against the ongoing crisis have failed in the country, due to the ravaging effects of COVID-19. Worse still, the ongoing conflicts around the world, including the war between Russia and Ukraine and the resulting economic impact, have led to international response being focused on different, more hard-hit regions. For now, all the country can do is hope for more international aid in the far future to help survive this disaster.

Article written by Abishekraj Thyagarajan and Yajush Jayakrishnan

Updated 18 March 2022