Guidelines:

Topic for GD: "Sri Lanka’s economic crisis. "

 30 sec introduction/participant
 Topic to be introduced
 2 mins thinking time
 10 min speaking time
 Summary & Conclusion 30 sec each

Introduction:

• The country is facing the worst economic crisis in its history, which started in 2019. In the year
2022, even the prices of basic staple foods, and fuel are so high that the common people are
not able to afford them. 6.3 million people (28.3 per cent) in the country are food insecure and
this is likely to deteriorate as the crisis unfolds.

Why is Sri Lanka Suffering from Crisis?

 Background: When Sri Lanka emerged from a 26-year long civil war in 2009, its post-war GDP
growth was reasonably high at 8-9% per annum till 2012.
o However, its average GDP growth rate almost halved after 2013 as global commodity
prices fell, exports slowed down and imports rose.
o Sri Lanka’s budget deficits were high during the war and the global financial crisis of
2008 drained its forex reserves which led to the country borrowing a loan of $2.6 billion
loan from the IMF in 2009.
o It again approached the IMF in 2016 for another US$1.5 billion loan, however
the conditionalities of the IMF further deteriorated Sri Lanka’s economic health.
 Recent Economic Shocks: The Easter bomb blasts of April 2019 in churches in Colombo
resulting in 253 casualties, consequently, dropped the number of tourists sharply leading to a
decline in foreign exchange reserves.
o The Covid-19 pandemic in 2020 made the bad situation worse -
 Exports of tea, rubber, spices and garments suffered.
 Tourism arrivals and revenues fell further
 Due to a rise in government expenditures, the fiscal deficit exceeded 10% in
2020-21, and the debt to GDP ratio rose from 94% in 2019 to 119% in 2021.
 Sri Lanka’s Fertiliser Ban: In 2021, all fertiliser imports were completely banned and it was
declared that Sri Lanka would become a 100% organic farming nation overnight.
o This overnight shift to organic fertilisers heavily impacted food production.
o Consequently, the Sri Lankan President declared an economic emergency to contain
rising food prices, a depreciating currency, and rapidly depleting forex reserves.
The present situation in Sri Lanka:

• People are queuing up at stores to buy basic staple foods. There is a massive food and fuel
shortage in the country, and hence the prices of daily food items and fuel have increased to
unbearable levels.
• In June 2022, inflation in Sri Lanka is reached to 54.6%, which is an all-time high.
• There is a severe shortage of foreign exchange reserves. The country is not able to repay
foreign debt.
• Due to the severe shortage of foreign exchange reserves, the hospitals are struggling to buy
essential drugs and equipment to treat patients.
• The country’s currency value depreciated.
• India is helping Sri Lanka by sending financial assistance, food and medical supplies.

Reasons for the present economic crisis in Sri Lanka:

• Sri Lanka is heavily dependent on tourism. 10% of the country’s GDP comes with tourism.
With tourism, the country fills foreign exchange reserves and uses them to import goods. But
due to the Covid-19 pandemic, the tourism industry was hit very badly and that impacted the
country’s economy. Moreover, the terrorist attacks in Sri Lanka in the year 2019 too affected the
tourism sector. That resulted in a shortage of foreign exchange reserves.
• The majority part of the available foreign exchange reserves is being used to pay the interest
of the country’s debts. The external debt service payments for Sri Lanka stood at US$7 billion
for what remains of this year, against the foreign reserves of US$1.9 billion at the end of
March 2022.
• As the Sri Lankan rupees are sold to buy foreign currency to use for imports, the country’s
currency value depreciated.
• Sri Lanka imports some basic food items. With the shortage of foreign exchange reserves, the
imports were affected negatively and that contributed to food shortage.
• The country decided to go 100% organic in farming. Even though organic farming has plenty of
benefits for the environment and for the health of people, it gives very less yield in the initial
years of cultivation. Less produce contributed to even more food shortages. That resulted in
heavy demand and low supply and hence the prices rose sharply.

Moreover, due to less yield, Sri Lanka is forced to import more food, which put even more
pressure on foreign exchange reserves.
• Tea and spices are one of the main exports from Sri Lanka. Exports fetch foreign currency. But
the switch to organic farming resulted in a low yield of tea and spices.

Steps that were taken so far:

• The central bank of Sri Lanka raised interest rates to control inflation. The Monetary Board of
the Central Bank of Sri Lanka on Friday decided to increase the Standing Deposit Facility Rate
(SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 700 basis points to
13.50 per cent and 14.50 per cent, respectively

• Sri Lanka approached the International Monetary Fund (IMF) to bail its economy out of crisis.
IMF is monitoring the situation in the country.
 Sri Lanka’s economic crisis – Impact on India:
• The covid pandemic has pushed many people into poverty in Sri Lanka and the present
economic crisis made their situation even worse. As India is the immediate neighbour of Sri
Lanka, many people are migrating to India seeking refuge to escape from hunger. India has to
provide food, shelter and employment opportunities to the refugees from Sri Lanka. It can
become an additional burden to India’s economy, which is already struggling to tackle rising
inflation.
• India’s exports to Sri Lanka are shrinking because the traders in Sri Lanka are unable to pay for
imports. Moreover, many Indian exporters are worried about the stalled payments. But at the
same time, it gave an opportunity to the tea and textile industries in India to replace Sri
Lankan exporters and to export their products to European and American countries. Due to
fuel shortage transportation became costly, moreover, there is uncertainty. So, importers of Sri
Lankan products may prefer India over Sri Lanka.
• Many Indian companies invested in Sri Lanka in several sectors such as manufacturing,
tourism, hotel, banking etc. The economic crisis can affect the companies negatively.
• India depends on the Colombo port, a transhipment hub for global trade. That means the
goods from India to a few countries go through this port. At present, 60% of India’s trans-
shipment cargo is handled by the Colombo port. Due to the labour shortage and disruption in
transport facilities, many Indian shipments are stuck in Colombo port. This could impact India’s
exports and can increase costs when choosing alternative routes.
• India is sending relief materials and assistance to Sri Lanka. This is improving the relations
between India and Sri Lanka.

What Can Be the Way Forward?

 Measures for Sri Lanka: The government should take measures for economic recovery of the
country as soon as the shortage of certain essential commodities ends, which is expected
before the start of the Sinhala-Tamil New Year (in mid-April).
o The government should also join hands with the Tamil political leadership to create a
roadmap for the economic development of the war-affected northern and eastern
provinces, among the areas badly hit by the current crisis.
o It would be best to raise domestic tax revenue and shrink government
expenditure to limit borrowing, particularly sovereign borrowing from external
sources.
 Tough measures should be taken for restructuring the administration of
concessions and subsidies.
 India’s Assistance: It would be completely unwise for India to let the Chinese take over
expanding chunks of Sri Lankan territory. India must offer Sri Lanka financial help, policy advice
and investment from Indian entrepreneurs.
o Indian businesses must build supply chains that intertwine the Indian and Sri Lankan
economies in goods and services ranging from the export of tea to information
technology services.
o India, rather than any other nation, should help steer Sri Lanka towards realising its
potential, to reap the rewards of a stable, friendly neighbourhood.
 Preventing Illegal Refuge: The state of Tamil Nadu has already started feeling the impact of the
crisis with the reported arrival of 16 persons from Sri Lanka through illegal means.
 o Tamil Nadu was home to nearly three lakh refugees after the anti-Tamil pogrom of
1983.
o The authorities, both in India and Sri Lanka, should ensure that the present crisis is not
used to step up smuggling activities and trafficking or whip up emotions in both
countries.
 Crisis as an Opportunity: Neither Sri Lanka nor India can afford to have strained ties. As a much
larger country, the onus is on India, it needs to be extremely patient and engage Sri Lanka even
more regularly and closely.
o There is also a need to step up our people-centric developmental activities while
scrupulously staying clear of any interference in Colombo’s domestic affairs.
o The crisis should be used as an opportunity for New Delhi and Colombo to thrash out
a solution to the Palk Bay fisheries dispute - a longstanding irritant in bilateral ties.