Sri Lanka must learn lessons from its crisis

With forex falling, the Lanka government has not been able to pay for fuel and even food imports.

Sri Lanka is in the grip of an unprecedented economic crisis. Its central bank governor has warned that the country may not be able to make its debt payments this year. With its foreign currency reserves shrinking rapidly, it is on the verge of a sovereign debt default. The alarming state of its finances goes back several years. While the 25-year-long civil war was a drain on its economy, it was the massive loans on high interest that Sri Lanka took from China for grandiose infrastructure projects that did not earn it adequate returns that underlie the current crisis. Consider this: Sri Lanka’s foreign debt grew from 30% of its GDP in 2014 to 41.3% of GDP in 2019. Then came the 2019 Easter bombings, closely followed by the Covid-19 pandemic and the consequent lockdowns. Sri Lanka’s tourism industry, which is its main foreign exchange earner, employing 15% of its population, was badly hit; the pandemic cost the island roughly $4 billion of annual foreign currency earnings from tourism. Forex reserves plummeted from $7.5 billion in February 2020 to $1 billion in November 2021. The Ukraine crisis has further devastated the economy; Russia and Ukraine are major source markets for Sri Lanka’s tourism industry and importers of its tea.

Sri Lanka is heavily dependent on imports. With forex falling, the government has not been able to pay for fuel and even food imports. Not surprisingly then, essential commodities are in short supply, leading to spiralling prices. People are standing in long lines to buy milk powder and grains. Power shortages have forced the government to impose a nearly 8-hour power cut across the island. The poor are making do with a single meal a day. Pharmacies have run out of medicine. This is more than just an economic crisis; it is a humanitarian crisis.

Colombo has avoided going to the IMF to borrow. Instead, it has turned to India and China, even Bangladesh. India may extend it financial support yet again or agree to restructure debts. But this is not the solution to the crisis. Sri Lanka’s borrowing from other countries can at best only defer defaults. Sri Lankan leaders must end their addiction to borrowing heavily to fund vanity projects that fuel their ego and fill their pockets. They must act to fix the economy, attract investment and step-up local production. Instead of addressing the crisis, successive Sri Lankan governments have sought to benefit from geopolitical rivalries to draw investment or borrow to pay off debt. This will only leave Sri Lanka more vulnerable.

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