Sri Lanka Economic Crisis: All you need to know
The Sri Lankan economy has been experiencing one of the greatest economic crises in its whole history. Mishandled government finances and inopportune tax cuts, along with the impact of the Covid-19 pandemic situation, led Sri Lanka into an economic crisis.
Large amounts of foreign debt, the implementation of lockdowns, surging inflation, a lack of petroleum supply, a drop in foreign currency reserves, and currency devaluation have all deterred the country’s economic progress.
People are in outrage with Sri Lankan President Gotabaya Rajapaksa’s handling of the island nation’s mounting economic crisis erupted into violence.
Due to a significant lack of foreign money, Rajapaksa’s administration has been unable to pay for basic imports such as gasoline. Thus, resulting in devastating power outages lasting up to 13 hours.
Ordinary Sri Lankans are also experiencing shortages and rising prices as a result of the country’s sharp devaluation of its currency in preparation for discussions with the International Monetary Fund (IMF) over a loan programme. Let’s know more about the Sri Lanka Economic crisis.
Reason for the Sri Lanka Economic Crisis
Even before the Covid outbreak, Sri Lanka’s economy was in jeopardy. The lockdowns worsened economic problems and had a significant impact on the informal sector, which employs roughly 60% of the country’s workforce.
The country’s foreign exchange reserves have dropped by 70% in the last two years to just $2.31 billion. Thus, leaving it unable to pay for vital imports such as food and gasoline.
The financial crisis has also caused by a serious shortage of foreign money, which prevented dealers from financing imports.
Tourism, one of the country’s main sources of foreign cash, was severely affected by the Covid epidemic. Furthermore, remittances from Sri Lankans working abroad have fallen precipitously.
As of February, the government has just around $2.31 billion in foreign reserves. Despite the fact that it faces debt obligations of about $4 billion for the rest of the year.
“The cause for the shortages is not a scarcity of any goods, but a scarcity of money”. Dhananath Fernando, chief operating officer of Colombo think-tank Advocate Institute says.
The $4 billion debt includes a maturing $1 billion foreign sovereign bond in July.
Lack of resources
Unbearable power cuts
Fuel shortages were already causing lengthy power outages across the country. Even after extending the daily power outages to ten hours.
People have been experiencing 7-hour outages around the country since the beginning of this month.
The lack of fuel to create hydroelectricity has resulted in a 750-megawatt thermal power shortfall.
More than 40% of Sri Lanka’s power is generated by hydro. But most reservoirs were dangerously low due to a lack of rain, authorities said.
The main components utilised by the country for power production are coal and oil. The Sri Lankan government importing both resources, but in low supply due to the country’s lack of foreign cash.
The country’s largest fuel provider, the state-owned Ceylon Petroleum Corporation (CPC), announced that there would be no diesel for at least two days.
The CPC advised vehicle owners to leave and return to gas stations only after the availability of imported fuel.
No fuel, No transportation
People have to struggle for something as fundamental as petrol because the economic crisis is hitting them bad.
Sri Lanka has dispatched the military to petrol stations in response to occasional demonstrations among thousands of people waiting in line for fuel.
Fuel shortages have resulted in huge queues at gas stations and rolling power outages over most of the country.
A severe fuel shortage has forced the closure of many thermal power facilities, resulting in rolling power outages across the country.
Fuel costs have also risen repeatedly, with petrol up 92% and diesel up 76% since the beginning of the year.
According to authorities, it took the government 12 days to acquire $44 million to pay for the current cargo of LP gas and kerosene.
No food and medicine
Because of import limitations imposed by the currency crisis, all vital things are in limited supply, putting many people at the mercy of government handouts.
People appear to be becoming increasingly angry as they struggle to meet their necessities and worry about how to feed their families in the face of rising food prices.
A woman in Colombo that people line up every day, often before dawn, to get their ration of kerosene, which they may use to light their kitchen stoves. She also stated that a few individuals had fainted and felt terrible after not eating anything.
Another woman, a domestic servant, says she has lived in the nation for 60 years and has never seen anything like this. According to AFP, she also complained about not having anything to eat or drink.
Rising inflation
Colombo enacted a sweeping import embargo in March 2020 to conserve foreign currency required to settle its $51 billion in international loans. However, this has resulted in severe shortages of vital products and substantial price increases.
Many people in the country are choosing lower-cost food items to save money. They are also cutting their entertainment expenses to zero.
According to a report on the country’s local media website, even a cup of tea now costs Rs 100, up from Rs 25 in October last year.
Doctor’s visits and drugs have also gotten increasingly expensive, leading to an increase in self-medication. World Health Organization (WHO) states that it can lead to increased morbidity.
Many hospitals have ceased ordinary operations, while retailers have been forced to ration key items such as rice, sugar, and milk powder.
Earlier this month, the country’s central bank hiked interest rates to combat rising inflationary pressures. And encouraged the government to adopt steps such as restricting non-essential imports and hiking gasoline costs to relieve strain on the struggling economy.
In February, retail inflation was 15.1%, while food inflation was 25.7%, the most in a decade. The Central Bank of Sri Lanka (CBSL) aims to keep inflation in the 4-6% range in the medium term.
Devaluation of Sri Lankan Rupee
Sri Lanka’s central bank has devalued the Sri Lankan rupee by 15%.
With immediate effect, the Central Bank of Sri Lanka imposed an exchange rate restriction of 230 rupees per dollar, up from a range of 200-203 that had been in place since last year October.
CBSL offered a slew of initiatives in December, including an additional 10 rupees per dollar as an incentive. But this had little effect, with remittances falling 61.6% in January to $259 million from $675 million the previous year.
Rise in Unemployment
Job losses have become a typical occurrence in nearly every household. Furthermore, the decline in earnings has increased poverty rates.
According to World Bank data, the poverty share based on a daily income of $3.20 was predicted to have increased to 11.7% in 2020. Or by more than five lakh individuals from 9.2% the previous year.
During the Covid-19 lockdowns, the government recognised 5 million families with the “fragile financial position of low-income households”. And offered them a Rs 5,000 payment.
The Russia-Ukraine conflict has worsened the new economic downturn, which resulted in a sharp increase in oil prices. Hence, it didn’t last long. It delivered another kick in the teeth, and images of desperation and fear became increasingly widespread.
Even exams for millions of students in the country have been postponed owing to a scarcity of paper and ink.
India’s aid for Sri Lanka in the ongoing economic crisis
The Reserve Bank of India (RBI) announced a $400 million exchange to help Sri Lanka shore up reserves in January.
In February, it agreed to a $500 million credit line to purchase petroleum from India.
The arrangement was crucial since global oil prices skyrocketed when Russia attacked Ukraine. Thus, Sri Lanka’s fuel import costs increased by up to 40% in a week. Indian Oil Corporation (IOC) shipments have started to arrive in mid-March.
Following that, Sri Lanka and India agreed on a $1 billion credit line for the purchase of necessities such as food and medicine.
As shortages remain, the nation has requested an extra credit of atleast $1 billion from India to bring in necessities.
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Government has to take responsibility for the economic crisis.