Sunday, June 23, 2024

Sri Lankan Economic Crisis: All You Need to Know About

Two men died waiting in queue to fetch fuel amid the rising fuel prices as the Sri Lankan economic crisis widens. For weeks citizens have been queuing up to collect petrol and kerosene while the island country faces economic crisis-induced power cuts.

On September 1, Gotabaya Rajapaksha, the president of Sri Lanka, declared an economic emergency amid unprecedented inflation and plummeting currency and forex reserves.

As the crisis continued, Sri Lanka has been struggling to find dollars to buy increasingly expensive fuel shipments since January. It had to shut operations at its only fuel refinery as its crude oil reserves perished Sunday.

With its foreign currency reserves dipping to $2.31 billion in February, Sri Lanka’s inflation hit 15.1%, among the highest in Asia, with food inflation soaring to 25.7%, the latest government data showed.

How did Sri Lanka end up in Economic Crisis?

The debt-ridden country sunk into a deep economic crisis when the world faced Covid-19 pandemic-induced lockdowns since 2020.

Tanking Tourism Industry

Sri Lanka’s economy largely depends on tourism as it contributes 10 per cent to its GDP. However, it took a hard hit due to the Covid-19 pandemic. Moreover, observing its foreign exchange crisis, many countries have warned their citizens about travelling to Sri Lanka.

Ban on Chemical Fertilizers

The government announced a 100 per cent ban on chemical fertilizers. This decision impacted halving the agricultural produce and contributed to rising food inflation. In addition, the “food mafia” began to hoard essentials, resulting in the price rise of the essentials, including rice and sugar.

Sri Lanka’s central bank has devalued the rupee by 15%. Currently, one dollar equals 280.90 Sri Lankan Rupee. Amidst the deepening foreign exchange crisis, Sri Lanka’s dependence on imports of essentials has added to woes.

Burden of Foreign Debt

The third major reason for the country’s economic crisis is its huge foreign debt burden. At present, the country owes $ 51 billion in long term debt, $ 15 billion in bonds and $ 7 billion debt to pay this year.

Sri Lanka has run up an external debt owes over $8 billion in debt to China alone. Additionally, it is paying an additional $1 billion loan to Beijing that it took in 2021. Moreover, it also owes big money to India and Japan.

India Extends Helping Hand

Economic Crisis in Sri Lanka and India extends helping hand

Recently, Sri Lankan Finance Minister Basil Rajapaksha made his second trip to New Delhi in the last four months to discuss the ongoing crisis with the Indian Government. As a result, India had announced another $ 1 billion as a credit to its southern neighbour.

On January 15, India announced two credit lines for food and fuel, worth $1.5 billion and a $912 million loan, when External Affairs Minister S. Jaishankar spoke to Finance Minister Basil Rajapaksa.

Notably, the Indian side has provided a $500-million line of credit for purchasing fuel and a currency swap of $400 million under the Saarc facility over the past few months. It has also deferred the payment of $515 million due to the Asian Clearing Union.

India’s move in helping a neighbour during the crisis is expected to re-instate the Indo-Sri Lankan relations after past minor hiccups.

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