Located in South Asia, Sri Lanka is a nation of approximately 22 million people. Currently, this country is grappling with the worst economic crisis it has faced in seven decades, severely affecting the lives of millions who are now finding it challenging to afford basic necessities like food, medicine, fuel, and other essential commodities. The political and economic instability gripping the nation has prompted widespread protests, with hundreds of citizens invading the President’s residence and demanding a change of leadership.
Factors Leading up to the Sri Lankan Economic Crisis
Sri Lanka’s post-war economic revival saw its GDP grow at a relatively high rate of 8-9% per annum from 2009 to 2012. However, a sudden dip in global commodity prices, sluggish exports, and a rise in imports have seen the average growth rate practically halve since 2013. During the civil war, Sri Lanka’s budget deficits were high, leading the country to borrow USD 2.6 billion from the International Monetary Fund (IMF) in 2009 and another USD 1.5 billion in 2016.
Additionally, the terrorist attacks on Easter Sunday in 2019 led to a drastic drop in tourism, negatively impacting the nation’s foreign exchange reserves. Then came the Covid-19 pandemic, which took a toll on exports of tea, rubber, spices, and garments while weakening tourism further. As a result, the fiscal deficit exceeded 10% in 2020-21, and the debt-to-GDP ratio rose from 94% in 2019 to 119% in 2021.
Sudden Switch to Organic Farming and Its Impact
In a surprising move in 2021, Sri Lanka announced a complete ban on fertiliser imports and pledged to become a fully organic farming nation overnight. This abrupt transition had a serious effect on food production, leading to the declaration of an economic emergency as food prices soared, and foreign exchange reserves dwindled.
China’s Debt Trap and Its Impact on Sri Lanka
Since 2005, Sri Lanka has borrowed heavily from China for various infrastructure projects, pushing the country into a debt trap. Unable to service its USD 1.4 billion debt from Beijing, Sri Lanka leased its Hambantota port to a Chinese company in 2017. Currently, the country owes China approximately USD 8 billion, making up about a sixth of its total external debt.
Political Instability and Its Consequences
The existing political situation isn’t helping matters either. With both the Prime Minister and President hinting at their willingness to step down to make way for a bipartisan government, the country suffers from a lack of stable leadership.
The Indian Perspective: Challenges and Opportunities
India, too, feels the heat of the ongoing Sri Lankan economic crisis in terms of exports, with companies like Tata Motors and TVS Motors stopping exports to Sri Lanka due to its unstable forex reserves and fuel shortages. Moreover, every time there is a crisis in Sri Lanka, India sees a surge in refugees from the Tamil community seeking asylum.
Despite these challenges, there are opportunities for India as well. For instance, with the sudden halt in tea supply by Sri Lanka, India has the chance to fill in the gaps and strengthen its foothold in the global tea market. Furthermore, many apparel orders from the UK, EU, and Latin American countries are now being redirected to India.
The Need for India’s Assistance
Extending a helping hand to Sri Lanka in this hour of crisis holds strategic importance for India. Doing so could help India balance its diplomatic relations with Sri Lanka, which have been under strain due to Sri Lanka’s close ties with China. Additionally, India could leverage this opportunity to keep Sri Lanka out of China’s ‘string of pearls’ game in the Indo-Pacific region.
Steps Towards Recovery
For Sri Lanka to overcome its present crisis, it needs to generate a strong political consensus. An increased focus on boosting agricultural productivity, creating more job opportunities in non-farming sectors, implementing reforms, and reviving tourism could prove beneficial. Furthermore, help from India and a bailout from the IMF could serve as significant steps on the path to recovery. Lastly, adopting a circular economy, that minimises dependence on imports, could provide a sustainable solution for economic recovery.
