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Post at: Jun 13 2022

The Srilankan Economic Crisis

Why in News?

  • Island nation Sri Lanka is witnessing its worst economic crisis in decadus. It has announced suspension of payment of $51 B foreign debt.

About the Crisis

  • The country's 22 million people are facing crisis an many fronts-
    • There is long power cuts.
    • Extreme scarcity of food.
    • Spiraling fuel prices.
    • Shortage of medicines.

What led to the Economic Crisis?

  • Srilankan economy was in trouble even before the pandemic-
    • GDP growth rate shrank from 5% in 2015 to 2.9% in 2019.
    • Gross Government debt rose from 78.5% of the GDP in 2015 to 86.8% in 2019.
  • This crisis was accelerated by deep tax cuts promise by Raj paksha during 2019 election campaign and Covid-19 impact.
    • Estimates suggest that there was 33.5% decline in registered taxpayer between 2019 and 2020.
    • IT led to 2% GDP foregone.
  • Due to Covid-19
    • Exports of tea, rubber, spices and garments suffered.
    • Tourism which has significant contribution to GDP also impacted badly.
  • Another Factor, is ban import of fertilizers and announcement that Sri Lanka would be 100% organic farming nation.
    • This led to the fall in agricultural production and more import of food become necessory.
    • But increasing imports was difficult in the face of foreign exchange shortage.
    • It led to rise in inflation to 17.5% in February 2022.
  • The country's foreign exchange reserve have fallen 70 per cent in the past two years.
    • It is left with foreign reserve of only around $2.31 billion as of February.

Who is Helping Sri Lanka ?
IoMF

  • Sri Lanka is seeking up to $4 billion of help to import essential and pay creditors.
    • Sri Lanks's central bank has devalued the ruppee by up to 15 percent before this.
    • Far this, Srilankan Government has to present a sustainable debt programme.

India

  • India has so for committed $1.9billion in the form of loan, credit lines and currency swaps.
  • New Delhi has expressed willingness to give an extra $2 billion in swaps.
  • RBI has extended a currency swap of $400 million.

Chinese Debt trap of Sri Lanka

  • Sri Lanka's out standing debt with China is about $3.5billion or 10.8% of the total economy.
  • For India it is only around 2%.
  • While China's debt to Sri Lanka kept on rising, help from India has remained at constant level.
  • Sri Lanka's increased reliance an chinese loans is depicted as Sri Lanka falling in to their debt trap.

Conclusion

  • In order to deal with present economic crisis Sri Lankan Government need to stabilise the domestic politics and prepare a sound debt restructuring plan. For India, it presents an opportunity to limit Chinese influence and involvement in island nation.

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