PEARL IN DISTRESS
Faced with a slew of grim economic indicators, the tiny Island of Sri Lanka battles stoically to restore its equilibrium and secure a future for its people. SYNERGIA FOUNDATION R E S E A RCH
T E A M
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ince the start of the pandemic in 2020, the Sri Lankan economy, like all other economies around the world, has been faced with distress. However, the situation has taken a turn for the worse with the dawn of 2022. The double trap of low growth compounded by the rising debt burden has raised its ugly head. Sri Lanka has been facing twin deficits — fiscal deficit and trade deficit — during the major part of the last decade. Since 2014, its foreign debt level has been on the rise and reached 42.6 per cent of GDP in 2019. Towards the end of last year, Sri Lanka had declared an economic emergency after a steep fall in the value of its currency, the rupee, caused a spike in food prices. Authorities tried to take control of the supply of basic food items, including rice and sugar and set prices in an attempt to control rising inflation. The army was roped in to assist the civil administration, while poverty and unemployment levels rose to unprecedented levels, threatening a law-and-order situation. Despite the slow trickling in of foreign loans from friendly countries, the food and fuel crisis continues. The island nation stays blacked out for hours, as the National Electricity Board conserves precious fuel supplies, further impacting the struggling export-oriented industry.
A GRIM SITUATION
All economic parameters indicate a grim struggle looming ahead. As per World Bank estimates, nearly 500 000 citizens have slipped below the poverty line since the onset of the pandemic. This is rare for a country where the overall living standards were better than most other South Asian nations. Apart from the economic drag down of COVID-19, which shut the door on its flourishing tourism industry, experts call out the high government spending, tax cuts and debt re-
Apart from the economic drag down of COVID-19, which shut the door on its flourishing tourism industry, experts call out the high government spending, tax cuts and debt repayments, especially to China, as having further eroded state revenues. payments, especially to China, as having further eroded state revenues. The foreign exchange reserves dipped to their lowest levels in a decade. It must be recalled that China is a major investor in infrastructure and other projects in Sri Lanka, leading to a significant servicing obligation for an estimated $5 billion debt. To ease the situation, Beijing has agreed to smaller instalments being paid over a longer period. In order to save on the fertiliser bill, which adds to the import burden, the government decided to stop the use of fertilisers and pesticides in favour of going organic. The transition in these troubled times has not proved successful and has contributed to the rising food prices and rationing of staples like sugar and lentils. The rationing, however, led to hoarding in the black market, and the military had to be engaged to seize goods from warehouses and enforce sale to state agencies. Even though the restrictions on imported fertilisers were lifted, the damage had already been done to agriculture production. In an effort at damage control, the government has promised to pay 40,000 million rupees ($200m) to farmers whose harvests were affected by the chemical fertiliser ban. As a country heavily dependent on tourism, Sri Lanka has suffered acutely from the pandemic’s two-year-long travel bans. The World Travel and Tourism Council estimated that
