Sri Lanka is currently navigating a critical phase of economic recovery following a severe crisis in 2022. The World Bank has recently approved a billion-dollar loan to aid the country’s agriculture, tourism, and energy sectors. This support comes as Sri Lanka seeks to stabilise its economy and encourage growth after experiencing an unprecedented economic collapse.
Background of the Economic Crisis
In 2022, Sri Lanka faced an economic meltdown, marked by a lack of foreign exchange. This crisis resulted in shortages of essential imports, including food, fuel, and medicines. Widespread protests erupted, leading to the resignation of then-president Gotabaya Rajapaksa. His successor, Ranil Wickremesinghe, sought international assistance to restore economic stability.
World Bank Loan Details
The World Bank’s loan, amounting to one billion dollars, is intended to boost local industries and attract private investments. This funding will be disbursed over a period of three years. Ajay Banga, the World Bank President, emphasised the importance of creating job opportunities and enhancing conditions for private enterprise.
International Monetary Fund Involvement
In conjunction with the World Bank’s support, Sri Lanka secured a $2.9 billion bailout from the International Monetary Fund (IMF). This four-year package has been crucial in stabilising government revenues and facilitating the rescheduling of foreign debt, following a sovereign default on $46 billion in external borrowings in April 2022.
Economic Growth and Challenges
Despite the ongoing recovery efforts, portion of Sri Lanka’s population continues to live in poverty. The economy, however, has shown signs of growth, surpassing the World Bank’s forecast with a 5.0 percent expansion in 2024. This marks the first economic growth since the crisis.
Impact of US Tariffs
The IMF has raised concerns that the reinstatement of punitive US tariffs could hinder Sri Lanka’s recovery. The United States is a vital trading partner, accounting for nearly a quarter of Sri Lanka’s $12 billion in merchandise exports. A 44 percent “reciprocal tariff” was temporarily imposed by the US but has since been suspended for 90 days. Sri Lanka is currently seeking negotiations with the US to resolve this issue.
Future Prospects
To ensure sustained recovery, Sri Lanka must accelerate reforms and create a conducive environment for private sector growth. This includes focusing on sectors that can generate substantial employment opportunities. The collaboration between international financial institutions and the Sri Lankan government will be critical in navigating the post-crisis landscape.
Questions for UPSC:
- Analyse the factors that led to Sri Lanka’s economic collapse in 2022.
- Critically discuss the role of international financial institutions in economic recovery.
- Examine the impact of US tariffs on Sri Lanka’s trade and economic stability.
- Estimate the potential outcomes of the World Bank loan for Sri Lanka’s agriculture and tourism sectors.
Answer Hints:
1. Analyse the factors that led to Sri Lanka’s economic collapse in 2022.
- Severe shortage of foreign exchange limited essential imports like food, fuel, and medicines.
- Widespread protests against government mismanagement led to political instability and the resignation of President Gotabaya Rajapaksa.
- Heavy reliance on external debt resulted in a sovereign default on $46 billion in borrowings.
- Impact of the COVID-19 pandemic severely affected tourism, a key revenue source.
- Poor economic policies and corruption undermined investor confidence and economic stability.
2. Critically discuss the role of international financial institutions in economic recovery.
- The IMF provided a $2.9 billion bailout package to stabilize government revenues and manage debt.
- World Bank’s $1 billion loan aims to boost agriculture, tourism, and energy sectors, facilitating growth.
- Technical assistance and policy advice from these institutions help implement necessary economic reforms.
- Conditionalities tied to loans often encourage governments to adopt more sustainable fiscal policies.
- International support enhances credibility and attracts private investments, crucial for recovery.
3. Examine the impact of US tariffs on Sri Lanka’s trade and economic stability.
- The US is Sri Lanka’s largest trading partner, accounting for nearly 25% of its merchandise exports.
- A 44% “reciprocal tariff” imposed by the US could reduce Sri Lankan exports, impacting revenue.
- Temporary suspension of tariffs offers a reprieve, but uncertainty remains about future trade relations.
- Reinstatement of tariffs could hinder recovery efforts, especially in export-driven sectors like textiles.
- Negotiations with the US are crucial for maintaining favorable trade conditions and economic stability.
4. Estimate the potential outcomes of the World Bank loan for Sri Lanka’s agriculture and tourism sectors.
- The loan aims to enhance productivity and sustainability in agriculture, potentially boosting food security.
- Investment in tourism infrastructure could revitalize this sector, which is vital for economic recovery.
- Job creation in these sectors can reduce poverty levels and improve living standards for many citizens.
- Strengthening local industries may attract private investment, encouraging long-term growth.
- Successful implementation of the loan’s initiatives could lead to a more resilient economy post-crisis.
