How Sri Lanka, Once Promising, Turned Into An Economic Dystopia: 10 Facts

By 2009, Sri Lanka had developed a foul repute for having a fancy tariff construction, discouraging international commerce, regardless of counting on imports for even primary requirements. Whilst some relaxations have been launched in later years, this protectionist approach meant to assist the home trade from international competitors however ended up contributing to a international change disaster later. In truth, “saving foreign exchange” grew to become one of many causes for continued trade-unfriendly tariffs.

Sri Lanka’s financial system, however, acquired a brand new lease of life after the top of the 26-year-long civil battle in 2009. Eager to rebuild after the civil battle, the nation started specializing in massive infrastructure initiatives. This grew to become a double-edged sword – it helped increase the financial system within the quick run however triggered a ‘debt lure.’

Between 2009-2012, the island nation recorded an annual growth rate of over 8 per cent. Submit which, the expansion story continued for a couple of extra years, albeit at a decreased fee. The expansion, as famous by the World Financial institution, was largely pushed largely by non-structural, short-term and non-tradable sectors like building, transport, home commerce and banking, insurance coverage and actual property. 

A 2015 World Bank report known as Sri Lanka “a growth success story” for its financial progress and a major discount in poverty charges. To additional consolidate its financial good points, in 2017, the federal government launched ‘Vision 2025‘, which aimed to make Sri Lanka “a wealthy nation by 2025”.  

The post-civil battle period noticed a resurgence in tourism – one of many greatest foreign exchange earners and employment mills for Sri Lanka. Whereas Sri Lanka recorded a 46.1 per cent progress – the very best in vacationer arrivals in 2010, the island nation welcomed a file 2.33 million vacationers in 2018.  

In 2019, the Rajapaksa authorities introduced a major tax lower, resulting in a income lack of over $1.4 billion a 12 months, per estimates. Restrictive tariffs contributed additional to the commerce deficit, with imports far exceeding exports. In Might 2022, the trade deficit stood at $404 million. 

The commerce deficit, the decline in tourism after the Easter Bombings and coronavirus pandemic, and falling remittances dwindled Sri Lanka’s foreign exchange reserves. The tourism sector, particularly, was badly hit, with simply 1.94 lakh arrivals in 2021. Tourism income declined from $4.4 billion in 2018 to only $633 million in 2021. Employees’ remittances, one other supply of foreign exchange, declined to $5.49 billion in 2021, its lowest degree since 2012.  

The 2021 resolution to undertake natural farming and ban chemical fertilizers dealt a blow to the agriculture sector. Whereas the government-linked the choice to public well being, many counsel it was accomplished to save lots of foreign exchange reserves as chemical fertilizers are a key import good. The transfer was blamed for the declining yields and the resultant meals disaster, which led to the federal government declaring an emergency final 12 months.  

Sri Lanka’s usable foreign exchange reserves reached their lowest level – $50 million – in Might 2022 amid a spiraling exterior debt. In response to reviews, Sri Lanka will want no less than $5 billion for important provides within the subsequent six months. Low reserves have led to a scarcity of necessities like gas. In the meantime, inflation too has risen sharply. Whereas the headline inflation rose from 39.1 per cent in Might to over 50 per cent in June, meals inflation spiked from 57.4 per cent in Might to over 80 per cent in June 2022.  

The depleting foreign exchange reserves and a rampant dollar have hampered Sri Lanka’s means to service its exterior debt, which is over $51 billion. In Might this 12 months, the island nation defaulted on its debt compensation – amounting to $7 billion – for the primary time. As per a European Parliament report, “Japan held debt amounting to 4.4 per cent of Sri Lankan GDP, India 1 per cent, Korea 0.5 per cent, Germany and France 0.3 per cent every”. Beneath scrutiny for its ‘debt lure’ diplomacy, Sri Lanka’s debt held by China amounted to six.9 per cent of the GDP.