Sri Lanka’s economic crisis amidst Covid

PANO RIGHT

Sri Lanka is facing its worst economic crisis in the past fifty years; its economy has registered the lowest GDP per capita annual growth — 4.1% in 2020, which is lower than its previous worst economic downturn of 2001 (GDP per capita annual growth was -2.25%). Several macroeconomic indicators of the country show a steep decline over the years after the outbreak of the Covid pandemic such as employment, growth rate, foreign reserve, etc.

Subsequently, there is a rise in inflation which has accelerated to 14% according to the National Consumer Price Index in December 2021, for the second consecutive month after inflation recorded a double-digit high in November 2021. This led to the high price of daily consumer goods exorbitantly (national consumer price index to 11.2%) which many Sri Lankans cannot afford to buy. Food prices went 6.3% while non-food items rose to 1.3% in December.

Pandemic has affected the economy of the country badly because of the imposed restriction on travel. The World Travel and Tourism Council stated that more than 2 lac people lost jobs during the pandemic from the travel and tourism sector which contributes 10% of its GDP. According to World Bank estimates, more than 5 lac fell below the poverty line since the inception of the pandemic.

The country’s currency, the rupee has lost 1/5th of its value and continues to slide further which limits its ability to buy food items from another country at a cheaper price.

The agricultural output of the country was exacerbated due to the ban of chemical fertilizers by the government last year resulting in a decline in agricultural produce and price rise in essential food items. The hasty decision by the government to force farmers to adopt organic farming without making them prepare for the change led to widespread hoarding of the fertilizers and eventual crackdown by the government.

This crisis is also deleteriously impacting other sectors such as rubber. There have been imposed power cuts at peak hours because of its inability to obtain fuel as the electricity board has large unpaid bills. Rubber plantation workers are facing wage cuts, getting less attention from the government despite being the 3rd most important export from the country.

China has lent money to Sri Lanka for the construction of ports, highways, airports, coal power plants during the last decade, the crucial being the Hambantota port and Beijing’s Belt and Road Initiative (BRI), which faced severe criticisms from the US calling it a “debt trap” for developing countries, thus getting vulnerable pressure to repay from Beijing.

Sri Lanka has to pay a huge foreign debt to countries like China, India, and Japan; mostly to China which owes more than $6bn that has to be paid in coming years. Sri Lanka will repay the approximate debt of $7.3bn in a year (this comprises a $500m International Sovereign Bond). This is an uphill task for the country to fulfil the promises of repaying the debt as it has just $1.6bn foreign currency reserves available at its disposal.

Sri Lanka is forced to pay $5m worth of tea every month to Iran as part of its oil bill. This would again hurt the economy adversely as it cannot continue repaying its debt in kind for a longer period of coming time.

Countries in Asia, Africa, and Latin America got the bailout package from the IMF, the World Bank to avoid bankruptcy threats. The Sri Lankan government is still having a round of talks with the cabinet for the bailout plan to be forwarded to the IMF for the reasons of stringent conditionalities imposed by the IMF.

Meanwhile, India has provided financial support of $1bn to the country and Sri Lanka hopes to get another $1.5bn aid to maintain its economy running for the time being. Both the countries are working on the issues of lines of credit for medicine imports, food, fuel, currency swaps, debt postponement from India to Sri Lanka, and completion of the Trinco-oil farm project.

In the short run, the country might try to get some more financial assistance from other countries such as Japan or the USA but this aid would not be sufficient unless its macroeconomic indicators are not taken care of. Soon, it needs to focus more on BoP (balance of payment), foreign reserve, and simultaneously tacking inflation and employment which can be too much to manage swiftly.

(Choudhary is a professor at the Department of Political Science, Kumaraguru College of Liberal Arts and Science, Coimbatore. Madhubrota is PhD Scholar at Institute for Social and Economic Change, Bengaluru.)