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Current Affairs

Sri Lanka economic crisis

Date: 06 April 2022 Tags: India & World

Issue

The public anger against the handling of economic crisis by the Gotabaya Rajapaksa regime turned into violent demonstrations.

 

Background

Sri Lanka is under a serious economic crisis due to twin deficit and sovereign debt. Inflation in the country of 22 million is at the highest since independence.

 

Details

  • The government is witnessing serious shortage of foreign currency, which has resulted in shortage of essential commodities such as food and fuel.

  • The country is under long power cuts and the government has stopped street lights. Ordinary Lankans are unable to buy even the basic ingredients.

  • The central Bank of the country deeply undervalued its currency to tackle the challenge and start talks with IMF for loan programme.

 

Start of the crisis

  • Critics say that the crisis started due to economic mismanagement by successive governments that created a twin deficit.

  • The crisis was accelerated due to the steep tax cuts announced by the Rajapaksa regime following an electoral promise.

  • The event preceded the Covid-19 pandemic that wiped out large portion of Sri Lankan economy, along with decrease in revenues.

  • As the tourism industry collapsed and foreign remittances fell, the credit ratings of Sri Lanka was degraded. It could not borrow from capital market.

  • Without access to capital market, Sri Lanka had to rely on its foreign reserves to honour sovereign debts. Its reserves fell by 70 percent within two years.

  • The domestic food production declined drastically after government put ban on imports of chemical fertiliser. The food crisis intensified.

 

Possible solution

  • The government is coordinating with the IMF for a loan programme. It is already receiving essentials such as rice and fuel from India on credit line.

  • Sri Lanka has asked China to provide a credit facility of $1.5 billion. It has asked India to increase its credit for medicines.

 

Twin deficit

It is an economic condition in which a government witnesses a budget shortfall alongside a current account deficit.