A Project Report On

“Sri Lanka Crisis”

Submitted in partial fulfilment of the requirement for the award of

MASTERS OF BUSINESS ADMINISTRATION

From
NARAYANA BUSINESS SCHOOL, AHMEDABAD

Subject: Managerial Economics

Component: (Specify CEC/Internal)

Submitted By:
NAME: Rohit Dore, Sonal Jain, Prachi Shukla
BATCH: MBA 2022-24
ROLL NO: 147
SECTION: Theta
DATE OF SUBMISSION: 25-09-2022

Under The Guidance Of

NAME: Ms. Hiral Sonkar
DEPARTMENT: Marketing
 INDEX

Sr. No. Topic Page Number

1 Introduction to Economics
2 Importance of Economics
3 Factors Affecting Economy
4 Parameters of Economic Development
5 Economic Crisis
6 Notable Examples of Economic Crisis
7 Introduction to Sri Lanka
8 Sri Lankan Economy & Crisis
9 Corrective Actions
10 Conclusion
11 References
 Introduction to Economy

Economics is a social science that focuses on the production, distribution, and consumption of goods
and services, and analyzes the choices that individuals, businesses, governments, and nations make
to allocate resources. Assuming humans have unlimited wants within a world of limited means,
economists analyze how resources are allocated for production, distribution, and consumption.

The study of microeconomics focuses on the choices of individuals and businesses,

and macroeconomics concentrates on the behavior of the economy as a whole, on an aggregate level.
Economics focuses on the behaviour and interactions of economic agents and how economics work.
Microeconomics analyzes what's viewed as basic elements in the economy, including individual
agents and markets, their interactions, and the outcomes of interactions. Individual agents may
include, for example, households, firms, buyers, and sellers. Macroeconomics analyzes the economy
as a system where production, consumption, saving, and investment interact, and factors affecting it:
employment of the resources of labour, capital, and land, currency inflation, economic growth, and
public policies that have impact on these elements.

The study of markets is a powerful, informative, and useful method for understanding the world
around us, and interpreting economic events. The use of supply and demand allows us to understand
how the world works, how changes in economic conditions affect prices and production, and how
government policies and programs affect prices, producers, and consumers. A huge number of diverse
and interesting issues can be usefully analyzed using supply and demand.

 
When studying supply, we seek to isolate the relationship between the price and quantity supplied of
a good. We must hold everything else constant (ceteris paribus) to make sure that the other supply
determinants are not causing changes in supply. An example is the supply of organic cotton.
Patagonia spearheaded the movement into using organic cotton in the production of clothing. Nike
and other clothing manufacturers are increasing organic clothing production to meet the growing
demand for this good. Interestingly, conventional (non-organic) cotton is the most chemical-intensive
field crop, and can result in agricultural chemical runoff in the soil and groundwater. A small but
convicted group of consumers are willing to pay high premiums for clothing made with organic
cotton, to reduce the potential environmental damage from agricultural chemicals used in cotton
production.

Importance of Economics
The study of economics helps people understand the world around them. It enables people to
understand people, businesses, markets and governments, and therefore better respond to the threats
and opportunities that emerge when things change. Economics majors are well-positioned in an ever-
changing world because they have problem solving and analytical skills that allow them to succeed in
variety of career paths—law, risk management, actuary, finance, foreign affairs, public
administration, politics, policy analysis, health administration, entrepreneurship, market analysis,
journalism, and unknown careers of the future.
The breadth and flexibility of an economics degree prepares students to adjust to unexpected changes
and take advantage of unexpected opportunities. A study by LinkedIn found that college graduates
change jobs and careers about four times in the first ten years after graduation. With its wide-ranging
applications, economics is a great choice in an ever-changing world.
Economics, at its core, is the study of how to evaluate alternatives and make better choices. It
develops critical-thinking and problem-solving skills to make good decisions. It develops analytical
skills to examine data to support good decisions. These skills are desired across careers in the public
and private sectors. An annual study by the National Association of Colleges and Employers (NACE)
consistently finds that employers want the skills gained from studying economics—the ability to
make decisions, solve problems, obtain and process information, analyze data, and write and speak
effectively.
No matter what the future holds, an economics major helps people succeed. Understanding how
decisions are made, how markets work, how rules affect outcomes, and how economic forces drive
social systems will equip people to make better decisions and solve more problems. This translates to
success in work and in life.
Economics provides the primary framework for public policy analysis. The major equips people to
understand the fundamental policy issues that shape market and social outcomes. An economist
understands the immediate issues like tradeoffs, benefits versus costs, market failure, public finance,
but also understands the broader issues of generational impacts, welfare impacts, and inequality.
Economics majors are equipped with the language and skills to engage in public policy debates and
act to advance economic and social progress.
 Factors Affecting Economy

There are mainly two types of determinants (factors) which influence the economic development of a

country.

A) Economic Factors in Economic Development:

In a country’s economic development, the role of economic factors is decisive. The stock of capital

and the rate of capital accumulation in most cases settle the question whether at a juven point of time

a country will grow or not. There are a few other economic factors which also have some bearing on

development but their importance is hardly comparable to that of capital formation. The surplus of

foodgrains output available to support urban population, foreign trade conditions and the nature of

economic system are some such factors whose role in economic development has to be analyzed:

1) Capital Formation:

The strategic role of capital in raising the level of production has traditionally been acknowledged in

economics. It is now universally admitted that a country which wants to accelerate the pace of

growth, has m choice but to save a high ratio-of its income, with the objective of raising the level of

investment. Great reliance on foreign aid is highly risky, and thus has to be avoided. Economists

rightly assert that lack of capital is the principal obstacle to growth and no developmental plan will

succeed unless adequate supply of capital is forthcoming.

Whatever be the economic system, a country cannot hope to achieve economic progress unless a

certain minimum rate of capital accumulation is realized. However, if some country wishes to make

spectacular strides, it will have to raise its rate of capital formation still higher.

2) Natural Resources:

The principal factor affecting the development of an economy is the natural resources. Among the

natural resources, the land area and the quality of the soil, forest wealth, good river system, minerals

and oil-resources, good and bracing climate, etc., are included. For economic growth, the existence of

natural resources in abundance is essential. A country deficient in natural resources may not be in a

position to develop rapidly. In fact, natural resources are a necessary condition for economic growth

but not a sufficient one. Japan and India are the two contradictory examples.
According to Lewis, “Other things being equal man can make better use of rich resources than they

can of poor”. In less developed countries, natural resources are unutilized, under-utilized or mis-

utilized. This is one of the reasons of their backwardness. This is due to economic backwardness and

lack of technological factors.

According to Professor Lewis, “A country which is considered to be poor in resources may be

considered very rich in resources some later time, not merely because unknown resources are

discovered, but equally because new methods are discovered for the known resources”. Japan is one

such country which is deficient in natural resources but it is one of the advanced countries of the

world because it has been able to discover new use for limited resources.

3) Marketable Surplus of Agriculture:

Increase in agricultural production accompanied by a rise in productivity is important from the point

of view of the development of a country. But what is more important is that the marketable surplus of

agriculture increases. The term ‘marketable surplus’ refers to the excess of output in the agricultural

sector over and above what is required to allow the rural population to subsist.

The importance of the marketable surplus in a developing economy emanates from the fact that the

urban industrial population subsists on it. With the development of an economy, the ratio of the urban

population increases and increasing demands are made on agriculture for foodgrains. These demands

must be met adequately; otherwise the consequent scarcity of food in urban areas will arrest growth.

In case a country fails to produce a sufficient marketable surplus, it will be left with no choice except

to import foodgrains which may cause a balance of payments problem. Until 1976-77, India was

faced with this problem precisely. In most of the years during the earlier planning period, market

arrivals of foodgrains were not adequate to support the urban population.

If some country wants to step-up the tempo of industrialization, it must not allow its agriculture to lag

behind. The supply of the farm products particularly foodgrains, must increase, as the setting-up of

industries in cities attracts a steady flow of population from the countryside.

4) Conditions in Foreign Trade:

The classical theory of trade has been used by economists for a long time to argue that trade between

nations is always beneficial to them. In the existing context, the theory suggests that the presently less

developed countries should specialize in production of primary products as they have comparative

cost advantage in their production. The developed countries, on the contrary, have a comparative cost

advantage in manufactures including machines and equipment and should accordingly specialize in

them.

In the recent years, a powerful school has emerged under the leadership of Raul Prebisch which

questions the merits of unrestricted trade between developed and under-developed countries on both

theoretical and empirical grounds.

Foreign trade has proved to be beneficial to countries which have been able to set-up industries in a

relatively short period. These countries sooner or later captured international markets for their

industrial products. Therefore, a developing country should not only try to become self-reliant in

capital equipment as well as other industrial products as early as possible, but it should also attempt to

push the development of its industries to such a high level that in course of time manufactured goods

replace the primary products as the country’s principal exports.

In countries like India the macro-economic interconnections are crucial and the solutions of the

problems of these economies cannot be found merely through the foreign trade sector or simple

recipes associated with it.

5) Economic System:

The economic system and the historical setting of a country also decide the development prospects to

a great extent. There was a time when a country could have a laissez faire economy and yet face no

difficulty in making economic progress. In today’s entirely different world situation, a country would

find it difficult to grow along the England’s path of development.

The Third World countries of the present times will have to find their own path of development. They

cannot hope to make much progress by adopting a laissez faire economy. Further, these countries

cannot raise necessary resources required for development either through colonial exploitation or by

foreign trade. They now have only two choices before them:

i) They can follow a capitalist path of development which will require an efficient market

system supported by a rational interventionist role of the State.

ii) The other course open to them is that of economic planning.

The latest experiments in economic planning in China have shown impressive results. Therefore,

from the failure of economic planning in the former Soviet Union and the erstwhile East European

socialist countries it would be wrong to conclude that a planned economy has built-in inefficiencies

which are bound to arrest economic growth.

B) Non-Economic Factors in Economic Development:

From the available historical evidence, it is now obvious that non- economic factors are as much

important in development as economic factors. Here we attempt to explain how they exercise

influence on the process of economic development:

1) Human Resources:

Human resources are an important factor in economic development. Man provides labour power for

production and if in a country labour is efficient and skilled, its capacity to contribute to growth will

decidedly be high. The productivity of illiterate, unskilled, disease ridden and superstitious people is

generally low and they do not provide any hope to developmental work in a country. But in case

human resources remain either unutilized or the manpower management remains defective, the same

people who could have made a positive contribution to growth activity prove to be a burden on the

economy.
2) Technical Know-How and General Education:

It has never been, doubted that the level of technical know-how has a direct bearing on the pace of

development. As the scientific and technological knowledge advances, man discovers more and more

sophisticated techniques of production which steadily raise the productivity levels.

Schumpeter was deeply impressed by the innovations done by the entrepreneurs, and he attributed

much of the capitalist development to this role of the entrepreneurial class. Since technology has now

become highly sophisticated, still greater attention has to be given to Research and Development for

further advancement. Under assumptions of a linear homogeneous production function and a neutral

technical change which does not affect the rate of substitution between capital and labour, Robert M.

Solow has observed that the contribution of education to the increase in output per man hour in the

United States between 1909 and 1949 was more than that of any other factor.

3) Political Freedom:

Looking to the world history of modern times one learns that the processes of development and

underdevelopment are interlinked and it is wrong to view them in isolation. We all know that the

under-development of India, Pakistan, Bangladesh, Sri Lanka, Malaysia, Kenya and a few other

countries, which were in the past British colonies, was linked with the development of England.

England recklessly exploited them and appropriated a large portion of their economic surplus.

Dadabhai Naoroji has also candidly explained in his classic work ‘Poverty and Un-British Rule in

India’ that the drain of wealth from India under the British was the major cause of the increase in

poverty in India during that period, which in turn arrested the economic development of the country.

4) Social Organisation:

Mass participation in development programs is a pre-condition for accelerating the growth process.

However, people show interest in the development activity only when they feel that the fruits of

growth will be fairly distributed. Experiences from a number of countries suggest that whenever the

defective social organisation allows some elite groups to appropriate the benefits of growth, the

general mass of people develop apathy towards State’s development programs. Under the

circumstances, it is futile to hope that masses will participate in the development projects undertaken
by the State.

India’s experience during the whole period of development planning is a case in point. Growth of

monopolies in industries and concentration of economic power in the modern sector is now an

undisputed fact. Furthermore, the new agricultural strategy has given rise to a class of rich peasantry

creating widespread disparities in the countryside.

5) Corruption:

Corruption is rampant in developing countries at various levels and it operates as a negative factor in

their growth process. Until and unless these countries root-out corruption in their administrative

system, it is most natural that the capitalists, traders and other powerful economic classes will

continue to exploit national resources in their personal interests.

The regulatory system is also often misused and the licenses are not always granted on merit. The art

of tax evasion has been perfected in the less developed countries by certain sections of the society and

often taxes are evaded with the connivance of the government officials.

6) Desire to Develop:

Development activity is not a mechanical process. The pace of economic growth in any country

depends to a great extent on people’s desire to develop. If in some country level of consciousness is

low and the general mass of people has accepted poverty as its fate, then there will be little hope for

development.

According to Richard T. Gill, “The point is that economic development is not a mechanical process; it

is not a simple adding- up of assorted factors. Ultimately, it is a human enterprise. And like all human

enterprises, its outcome will depend finally on the skill, quality and attitudes of the men who

undertake”.
 Parameters of Economic Development
An economic indicator is a metric used to assess, measure, and evaluate the overall state of health of
the macroeconomy. Economic indicators are often collected by a government agency or private
business intelligence organization in the form of a census or survey, which is then analyzed further to
generate an economic indicator.
Financial analysts and investors keep track of macroeconomic indicators because the economy is a
source of systematic risk that affects the growth or decline of all industries and companies.

The Gross Domestic Product (GDP) is widely accepted as the primary indicator of macroeconomic
performance. The GDP, as an absolute value, shows the overall size of an economy, while changes in
the GDP, often measured as real growth in GDP, show the overall health of the economy.

The GDP consists of four components, namely:

1. Consumption
2. Investment
3. Government Expenditure
4. Net Exports

However, for all its uses, GDP is not a perfect measure of the economy. It is because GDP can vary
by political definition even if there is no difference in the economy. For example, the EU imposed a
rule on indebtedness that a country should maintain a deficit within 3% of its GDP. By estimating and
including the black market in its GDP calculations, Italy boosted its economy by 1.3%. It gave the
Italian government more freedom in budgetary spending.

Another issue relating to reliance on GDP as an economic indicator is that it is only released every
three months. In order to make timely decisions, alternative economic indicators that are released
more frequently are used. The indicators, which are selected based on a high predictive value in
relation to GDP, are used to forecast the overall state of the economy.

In the US, one of the most followed economic indicators is the Institute of Supply Management’s
Purchasing Manager’s Index or PMI for short. The ISM’s PMI is a survey sent to businesses that span
across all North American Industrial Classification System. categories to collect information on
production levels, new orders, inventories, deliveries, backlog, and employment. The information
collected can be used to forecast the overall business confidence within the economy and helps
determine if it shows an expansionary or contractionary outlook.

One of the reasons why PMI is one of the most followed economic indicators is because of its strong
correlation with GDP while being one of the first economic indicators to be released monthly. The
component GDP that the PMI most closely relates to is the Investment component.

While not directly related to the GDP, inflation is a key indicator for financial analysts because of its
significant effect on company and asset performance. Inflation erodes the nominal value of an asset,
which leads to a higher discount rate. Based on the fundamental principle of the Time Value of
Money (TVM), it means that future cash flows are worth less in present terms.
To measure inflation, one of the most followed indicators is the Consumer Purchasing Index (CPI).
The CPI measures the change of prices of a basket of goods, relative to a base year. The formula of
CPI is:

Basket PriceT
CPI =
Basket Price O

A basket is aggregated by the most consumed consumer goods or services. The price of the basket is
then measured against the same basket in the base year. The CPI includes several variants.

Core CPI is the CPI excluding prices from energy and food-related products. The reason is that
energy and commodity food markets experience high volatility in prices. Removing the two items
provides a more stable measure of CPI.

Some more common economic indicators are:

 Stock Market Performance

 Retail Sales Figures
 Building Permits and Housing Starts
 Level of Manufacturing Activity
 Inventory Balances
 GDP Growth
 Income and Wage Growth/Decline
 Unemployment Rate
 CPI (Inflation)
 Interest Rates (risking/falling)
 Corporate Profits
 Economic Crisis
A financial crisis, also known as an economic crisis, is any of a broad variety of situations in which
some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th
centuries, many financial crises were associated with banking panics, and many recessions coincided
with these panics. Other situations that are often called financial crises include stock market
crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults. Financial
crises directly result in a loss of paper wealth, but do not necessarily result in significant changes in
the real economy (e.g. the crisis resulting from the famous tulip mania bubble in the 17th century).
Many economists have offered theories about how financial crises develop and how they could be
prevented. There is no consensus, however, and financial crises continue to occur from time to time.

Economic crisis could be defined as a period of difficulty, dismay or an emergency in the life of a

country, a society or a corporation, or in relations of several countries. In other words, an economic
crisis is an unforeseen set of developments creating results which would affect states in the macro
level and corporations in the micro level. According to another definition, economic crisis could be
expressed as a situation that develops unexpectedly in the operation of the financial system or its sub-
components and affects the operation of the system in a significantly negative
manner. Economic crises experienced in national economies are usually a product of negative fallout
in the economic and political cycles and structures. But it could be stated that economic crises are a
general outcome of macro-economic instability.

A financial crisis may have multiple causes. Generally, a crisis can occur if institutions or assets
are overvalued, and can be exacerbated by irrational or herd-like investor behavior. For example, a
rapid string of selloffs can result in lower asset prices, prompting individuals to dump assets or make
huge savings withdrawals when a bank failure is rumored.

Contributing factors to a financial crisis include systemic failures, unanticipated or uncontrollable

human behavior, incentives to take too much risk, regulatory absence or failures, or contagions that
amount to a virus-like spread of problems from one institution or country to the next. If left
unchecked, a crisis can cause an economy to go into a recession or depression. Even when measures
are taken to avert a financial crisis, they can still happen, accelerate, or deepen.

The financial crisis can be segmented into three stages, beginning with the launch of the crisis.
Financial systems fail, generally caused by system and regulatory failures, institutional
mismanagement of finances, and more. The next stage involves the breakdown of the financial
system, with financial institutions, businesses, and consumers unable to meet obligations. Finally,
assets decrease in value, and the overall level of debt increases.
 Notable Examples of Economic Crisis

The Great Economic Depression

The Great Depression was a severe worldwide economic depression between 1929 and 1939 that

began after a major fall in stock prices in the United States. The economic contagion began around
September 4, 1929, and became known worldwide on Black Tuesday, the stock market crash of
October 29, 1929. The economic shock transmitted across the world, impacting countries to varying
degrees, with most countries experiencing the Great Depression from 1929. The Great Depression
was the longest, deepest, and most widespread depression of the 20th century and is regularly used as
an example of an intense global economic depression.
Between 1929 and 1932, worldwide GDP fell by an estimated 15%. By comparison, worldwide GDP
fell by less than 1% from 2008 to 2009 during the Great Recession. Some economies started to
recover by the mid-1930s. However, in many countries, the negative effects of the Great Depression
lasted until the beginning of World War II. Devastating effects were seen in both rich and poor
countries with falling personal income, prices, tax revenues, profits and prices. International trade fell
by more than 50%, unemployment in the U.S. rose to 23% and in some countries rose as high as 33%.
Cities around the world were hit hard, especially those dependent on heavy industry. Construction
was virtually halted in many countries. Farming communities and rural areas suffered as crop prices
fell by about 60%. Faced with plummeting demand and few job alternatives, areas dependent
on primary sector industries suffered the most.
Economic historians usually consider the catalyst of the Great Depression to be the sudden
devastating collapse of US stock market prices, starting on October 24, 1929. However, some dispute
this conclusion, seeing the stock crash less as a cause of the Depression and more as a symptom of the
rising nervousness of investors partly due to gradual price declines caused by falling sales of
consumer goods (as a result of overproduction because of new production techniques, falling exports
and income inequality, among other factors) that had already been underway as part of a gradual
depression.
The two classic competing economic theories of the Great Depression are the Keynesian (demand-
driven) and the Monetarist explanation. There are also various heterodox theories that downplay or
reject the explanations of the Keynesians and monetarists. The consensus among demand-driven
theories is that a large-scale loss of confidence led to a sudden reduction in consumption and
investment spending. Once panic and deflation set in, many people believed they could avoid further
losses by keeping clear of the markets. Holding money became profitable as prices dropped lower and
a given amount of money bought ever more goods, exacerbating the drop in demand. Monetarists
believe that the Great Depression started as an ordinary recession, but the shrinking of the money
supply greatly exacerbated the economic situation, causing a recession to descend into the Great
Depression.
Economists and economic historians are almost evenly split as to whether the traditional monetary
explanation that monetary forces were the primary cause of the Great Depression is right, or the
traditional Keynesian explanation that a fall in autonomous spending, particularly investment, is the
primary explanation for the onset of the Great Depression. Today there is also significant academic
support for the debt deflation theory and the expectations hypothesis that — building on the monetary
explanation of by adding non-monetary explanations.
There is a consensus that the Federal Reserve System should have cut short the process of monetary
deflation and banking collapse, by expanding the money supply and acting as lender of last resort. If
they had done this, the economic downturn would have been far less severe and much shorter.
Economic Crisis as a Result of COVID-19 Pandemic

The COIVD-19 pandemic has had far-reaching economic consequences including the COVID-19

recession, the second largest global recession in recent history, decreased business in the services
sector during the COVID-19 lockdowns, the 2020 stock market crash, which included the largest
single-week stock market decline since the financial crisis of 2007-08 and the impact of COVID-19
on financial markets, the 2021-22 global supply chain crisis, the 2021-22 inflation surge, shortages
related to the COVID-19 pandemic including the 2020-present global chip shortage, panic
buying, and price gouging. It led to governments providing an unprecedented amount of stimulus.
Possible instability generated by an outbreak and associated behavioural changes could result in
temporary food shortages, price spikes, and disruption to markets. Such price rises would be felt most
by vulnerable populations who depend on markets for their food as well as those already depending
on humanitarian assistance to maintain their livelihoods and food access. As observed in the 2007-08
world food price crisis, the additional inflationary effect of protectionist policies through import
tariffs and export bans could cause a significant increase in the number of people facing severe food
insecurity worldwide.
Many fashion, sport, and technology events have been canceled or have changed to be online. While
the monetary impact on the travel and trade industry is yet to be estimated, it is likely to be in the
billions and increasing.
Amidst the recovery and containment, the world economic system is characterized as experiencing
significant, broad uncertainty. Economic forecasts and consensus among macroeconomics experts
show significant disagreement on the overall extent, long-term effects and projected recovery. Risk
assessments and contingency plans therefore must be taken with a grain of salt, given that there is a
wide divergence of opinion. A large general increase in prices was also attributed to the pandemic. In
part, the record high-energy prices were driven by a global surge in demand as the world quit the
economic recession caused by COVID-19, particularly due to strong energy demand in Asia.
The COVID-19 crisis affected worldwide economic activity, resulting in a 7% drop in global
commercial commerce in 2020. While GVCs have persisted, several demand and supply mismatches
caused by the pandemic have resurfaced throughout the recovery period in 2021 and 2022 and have
been spread internationally through trade. 
During the first wave of the COVID-19 pandemic, businesses lost 25% of their revenue and 11% of
their workforce, with contact-intensive sectors and SMEs being particularly heavily impacted.
However, considerable policy assistance helped to avert large-scale bankruptcies, with just 4% of
enterprises declaring for insolvency or permanently shutting at the time of the COVID wave.
 Introduction to Sri Lanka

Sri Lanka, formerly known as Ceylon and officially the Democratic Socialist Republic of Sri
Lanka, is an island country in South Asia. It lies in the Indian Ocean, southwest of the Bay of
Bengal, and southeast of the Arabian Sea; it is separated from the Indian subcontinent by the Gulf of
Mannar and the Palk Strait. Sri Lanka shares a maritime border with India and the Maldives. Sir
Jayewardenepura Kotte is its legislative capital, and Colombo is its largest city and financial centre.

Sri Lanka's documented history goes back 3,000 years, with evidence of prehistoric human
settlements that dates back at least 125,000 years. The earliest known Buddhist writings of Sri Lanka,
known collectively as the Pali Canon, date to the fourth Buddhist Council, which took place in 29
BCE. Also called the Teardrop of India, or the Granary of the East, Sri Lanka's geographic location
and deep harbours have made it of great strategic importance, from the earliest days of the
ancient Silk Road trade route to today's so-called maritime Silk Route. Because its location made it a
major trading hub, it was already known to both Far Easterners and Europeans as long ago as
the Anuradhapura period (377 BC–1017 AD). During a period of great political crisis in the Kingdom
of Kotte, the Portuguese arrived in Sri Lanka and sought to control the island's maritime trade, with a
part of Sri Lanka subsequently becoming a Portuguese possession. The Dutch possessions were then
taken by the British, who later extended their control over the whole island, colonising it from 1815 to
1948. A national movement for political independence arose in the early 20th century, and in 1948,
Ceylon became a dominion. The dominion was succeeded by the republic named Sri Lanka in 1972.
 Sri Lankan Economy & Crisis

Sri Lanka has a long history as a trading hub as a result of being located at the centre of east–west
trade and irrigated agriculture in the hinterland, which is known from historical texts surviving within
the island and from accounts of foreign travellers. The island has irrigation reservoirs called tanks
built by ancient Kings starting after Indo-Aryan migration, many of which survive to this day. They
form part of an irrigation system interlinked with more modern constructions.
Faxian (also Fa Hsien) a Chinese Monk who travelled to India and Sri Lanka around 400 BC, writes
of existing legends at his time of merchants from other countries trading with native tribal peoples in
the island before Indo-Aryan settlement. "The country which originally had no human inhabitants but
was occupied by spirits and nagas (serpent worshipers) with which merchants of various countries
carried on a trade," Faxian wrote in 'A Record of Buddhistic Kingdoms'. He writes of precious stones
and pearl fisheries with a 30% tax by the king.
The monk had embarked "in a large merchant vessel" from India to arrive in the island. To go back to
China he "took passage in a large merchantman on board which were more than 200 men", ran into a
storm where the merchants were forced to throw part of the cargo overboard and arrived at Java-dvipa
(Indonesia), showing Sri Lanka had active coastal and long distance maritime trade links.
Japan when it gained independence from the British in 1948. Sri Lanka's social indicators were
considered "exceptionally high". Literacy was already 21.7% by the late 19th century. A Malaria
eradication policy of 1946 had cut the death rate from 20 per thousand in 1946 to 14 by 1947. Life
expectancy at birth of a Sri Lankan in 1948 at 54 years was just under Japan's 57.5 years. Sri Lanka's
infant mortality rate in 1950 was 82 deaths per thousand live births, Malaysia 91 and Philippines 102.
With its strategic location in the Indian Ocean Sri Lanka was expected to have a better chance than
most other Asian neighbors to register a rapid economic take-off and had "appeared to be one of the
most promising new nations." But the optimism in 1948 had dimmed by 1960. Nationalism had also
come to the fore, stoking ethnic tensions.
East Asia was gradually overtaking Sri Lanka. In 1950 Sri Lanka's un-adjusted school enrolment ratio
as a share of the 5-19 year age group was 54%, India 19%, Korea 43% and the Philippines 59%. But
by 1979 Sri Lanka's school enrollment rate was 74%, but the Philippines had improved to 85% and
Korea was 94%. Sri Lanka had inherited a stable macro-economy at independence. A central bank
was set up and Sri Lanka became a member of the IMF entering the Bretton Woods Systems of
currency pegs on August 29, 1950. By 1953 exchange controls were tightened with a new law.
The economy was then progressively controlled and relaxed in response to foreign exchange crises as
monetary and fiscal policies deteriorated. Controls and restrictions in 1961-64 were followed by
partial liberalization in 1965–70. Controls were continued after a devaluation in the wake of
1967 Sterling Crisis. Controls were tightened from 1970 to 1977 alongside the collapse of the Bretton
Woods System. "In sum it was a story of tightening partial relaxing, and again tightening the trade
regime and associated areas to over a perceived foreign exchange crisis," writes Saman Kelegama in
'Development in Independent Sri Lanka what went wrong'. "In the early 1960s strategy for dealing
with the foreign exchange crisis was the gradual isolation of the economy from external market
forces. It was the beginning of a standard import-substitution industrial regime with all the controls
and restrictions associated with such a regime. Expropriation and state intervention in economic
activities was common."
In 1960 Sri Lanka's (then Ceylon) per capita GDP was 152 dollars, Korea 153, Malaysia 280,
Thailand 95, Indonesia 62, Philippines 254, Taiwan 149. But by 1978 Sri Lanka's per capita GDP was
226, Malaysia 588, Indonesia 370 and Taiwan 505.
The 1970s also saw an uprising in the south from the JVP insurrection, and the roots of a civil war in
the North and the East.
In 1977, Colombo abandoned statist economic policies and its import substitution industrialisation
policy for market-oriented policies and export-oriented trade. Sri Lanka would after that be known to
handle dynamic industries such as food processing, textiles and apparel, food and beverages,
telecommunications, and insurance and banking. In the 1970s, the share of the middle class increased.
Between 1977 and 1994 the country came under UNP rule in which under President J T
Jayawardana Sri Lanka began to shift away from a socialist orientation in 1977. Since then, the
government has been deregulating, privatizing, and opening the economy to international
competition. In 2001, Sri Lanka faced bankruptcy, with debt reaching 101% of GDP. The
impending currency crisis was averted after the country reached a hasty ceasefire agreement with the
LTTE and brokered substantial foreign loans. After 2004 the UPFA government has concentrated on
mass production of goods for domestic consumption such as rice, grain and other agricultural
products. However twenty-five years of civil war slowed economic growth, diversification and
liberalisation, and the political group Janatha Vimukthi Peramuna (JVP) uprisings, especially the
second in the early 1980s, also caused extensive upheavals.
Following the quelling of the JVP insurrection, increased privatization, economic reform, and the
stress on export-oriented growth helped improve the economic performance, increasing GDP growth
to 7% in 1993. By 1996 plantation crops made up only 20% of exports (compared with 93% in 1970),
while textiles and garments accounted for 63%. GDP grew at an annual average rate of 5.5%
throughout the 1990s until a drought and a deteriorating security situation lowered growth to 3.8% in
1996.
The economy rebounded in 1997–98 with a growth of 6.4% and 4.7% – but slowed to 3.7% in 1999.
For the next round of reforms, the central bank of Sri Lanka recommends that Colombo expand
market mechanisms in nonplantation agriculture, dismantle the government's monopoly on wheat
imports, and promote more competition in the financial sector. Economic growth has been uneven in
the ensuing years as the economy faced a multitude of global and domestic economic and political
challenges. Overall, average annual GDP growth was 5.2% over 1991–2000.
In 2001, however, GDP growth was negative 1.4% – the first contraction since independence. The
economy was hit by a series of global and domestic economic problems and was affected by terrorist
attacks in Sri Lanka and the United States. The crises also exposed the fundamental policy failures
and structural imbalances in the economy and the need for reforms. The year ended in parliamentary
elections in December, which saw the election of United National Party to Parliament, while Sri
Lanka Freedom Party retained the presidency.
During the short-lived peace process from 2002 to 2004, the economy benefited from lower interest
rates, a recovery in domestic demand, increased tourist arrivals, a revival of the stock exchange, and
increased foreign direct investment (FDI). In 2002, the economy experienced a gradual recovery.
During this period Sri Lanka has been able to reduce defense expenditures and begin to focus on
getting its large, public sector debt under control. In 2002, economic growth reached 4%, aided by
strong service sector growth. The agricultural sector of the economy staged a partial recovery. Total
FDI inflows during 2002 were about $246 million.
The Mahinda Rajapakse government halted the privatization process and launched several new
companies as well as re-nationalising previous state owned enterprises, one of which the courts
declared that privatization is null and void. Some state-owned corporations became overstaffed and
less efficient, making huge losses with series of frauds being uncovered in them and nepotism
rising. During this time, the EU revoked GSP plus preferential tariffs from Sri Lanka due to alleged
human rights violations, which cost about US$500 million a year.
The resumption of the civil-war in 2005 led to a steep increase defense expenditures. The increased
violence and lawlessness also prompted some donor countries to cut back on aid to the country. A
sharp rise in world petroleum prices combined with the economic fallout from the civil war led to
inflation that peaked at 20%.
Pre-2009, there was a continuing cloud over the economy with the civil war and fighting between
the Government of Sri Lanka and the LTTE; however, the war ended with a resounding victory for
the Sri Lankan Government on 19 May 2009 with the total elimination of the LTTE.
As the civil war ended in May 2009 the economy started to grow at a higher rate of 8.0% in the year
2010 and reached 9.1% in 2012, mostly due to the boom in non-tradable sectors; however, the boom
did not last and the GDP growth for 2013 fell to 3.4% in 2013, and only slightly recovered to 4.5% in
2014.
According to government policies and economic reforms stated by Prime Minister and Minister of
National Policy and Economic Affairs Ranil Wickremesinghe, Sri Lanka plans to create Western
Region Megapolis, a Megapolis in the western province to promote economic growth. The creation of
several business and technology development areas island-wide specialised in various sectors, as well
as tourism zones are also being planned. In the mid to late 2010s, Sri Lanka faced a danger of falling
into economic malaise, with increasing debt levels and a political crisis which saw the country's debt
rating being dropped. In 2016 the government succeeded in lifting an EU ban on Sri Lankan fish
products which resulted in fish exports to EU rising by 200% and in 2017 improving human rights
conditions resulted in the European Commission proposing to restore GSP plus facility to Sri Lanka.
Sri Lanka's tax revenues per GDP also increased from 10% in 2014, which was the lowest in nearly
two decades to 12.3% in 2015. Despite reforms, Sri Lanka was listed among countries with the
highest risk for investors by Bloomberg. Growth also further slowed to 3.3% in 2018 and 2.3% in
2019. The rupee fell from 131 to the US dollar to 182 from 2015 to 2019, inflating foreign debt and
slowing domestic consumption ending a period of relative stability. China became a top creditor to Sri
Lanka over the last decade, overtaking Japan and the World Bank.
The main economic sectors of the country are tourism, tea export, apparel, textile, rice production and
other agricultural products. In addition to these economic sectors, overseas employment contributes
highly in foreign exchange.
As of the early 2020s, the debt-laden country is undergoing an economic crisis where locals are
experiencing months of shortages of food, fuel and electricity. Inflation has peaked to 57% according
to official data. In June 2022, Prime Minister Ranil Wickremesinghe declared in parliament the
collapse of the Sri Lankan economy, leaving it unable to pay for essentials.
After two years of money printing and tax cuts made for fiscal and monetary stimulus Sri Lanka
declared a 'pre-emptive negotiated default' saying most foreign debt would not be repaid from April
12. Fitch Ratings downgraded Sri Lanka to 'C' from 'CC' and said the country would be further
downgraded to restricted default (RD) once the first payment was missed. Standard and Poor's
downgraded the sovereign rating to 'CC' and said the country would be downgraded to selective
default (SD) after a payment was missed.
In 2021 Sri Lanka grew 4% amid though excessive central bank financing had led to balance of
payments deficits and foreign exchange shortages. Despite progress in managing Coronavirus,
external debt remains a challenge amid concerns over money printing under Modern Monetary
Theory independent economists had warned earlier. The central bank has said the economy is
managed in an alternative way. The country's public and publicly guaranteed debt could rise to 115%
in 2021 and poverty could worsen, the World Bank has warned.
The economy suffered a series of shocks in the form of a currency crisis which brought an
International Monetary Fund program in 2016, political instability in 2018 combined with a second
currency crisis and suicide bombings by an Islamist extremist group on Easter Sunday 2019.
The Finance Ministry has countered saying a lower interest bill, a gradual recovery in 2021, stronger
foreign direct investments to the Port City will strengthen economic activity and state finances. The
Treasury also hopes to borrow more domestically instead of from abroad.
Sri Lanka's national debt has been gradually rising amid weak growth and policy gridlock. Following
the steep rise in the deficit in 2020, central government debt rose to 101% of GDP. The debt to GDP
ratio rose to 86.8% in 2019 from 77.9% in 2017.
Sri Lanka's investment to GDP ratio is around 31%, made up of about 24% private and 5% public
investment. The private savings rate is about 24% and the government is a net dis-saver leaving a
domestic savings investment gap of around 7% of GDP. In 2019 investment fell to 27.4% of GDP
from 30.4% a year earlier with the domestic savings rate also falling to 21.3% of GDP from 23%. Sri
Lanka's savings rate is undermined by government dis-saving (the revenue deficit), which rose from
1.2 to 2.7% in 2019.
There are attempts to improve Sri Lanka's "Ease of Doing Business index' (Sri Lanka stood at 111 for
2018 down from 85th in 2014) and the overall tariff structure. In 1992, Sri Lanka's exports were on
par with countries like Vietnam and Bangladesh (at US$2bn), which has only grown to US$12bn by
end of 2017 compared to Vietnam's US$214bn and Bangladesh's US$36bn for 2017.
In the recent past, the Sri Lankan Government has identified some key focal areas to address the
external imbalances of the economy, especially with regard to reducing its high trade deficit (~15%
of GDP for 2012) in order to make the economy comply with the Marshall-Lerner condition. Sri
Lanka's oil import bill accounts for an estimated 27% of total imports while its pro-growth policies
have resulted in an investment goods import component of 24% of total imports. These inelastic
import components have led to Sri Lanka's Export goods price elasticity + Import goods price
elasticity totalling less than 1, resulting in the country not complying with the Marshall-Lerner
condition.
Some of the suggested proposals include:

 Import substitution of investment goods and consumer goods

 Tax concessions towards value-added exports
 Negotiating longer credit periods for oil imports
 Allowing the external value of the currency to be determined by market forces (with
minimal central bank intervention)

Sri Lanka is highly dependent on foreign assistance, and several high-profile assistance projects were
launched in 2003. The most significant of these resulted from an aid conference in Tokyo in June
2003; pledges at the summit, which included representatives from the International Monetary
Fund, World Bank, Asian Development Bank, Japan, the European Union and the United States,
totalled $4.5 billion.
During the years before 2016, the country's debt has soared as it was developing its infrastructure to
the point of near bankruptcy which required a bailout from the IMF. "Without an IMF loan, Sri Lanka
would have been in a precarious position" in May 2016, according to Krystal Tan, an Asia economist
at Capital Economics, who added "foreign exchange reserves only covered around 80 per cent of
short-term external debt." The IMF had agreed to provide a $1.5 billion bailout loan in April 2016
after Sri Lanka provided a set of criteria intended to improve its economy.
By the fourth quarter of 2016, the debt was estimated to be $64.9 billion. Additional debt had been
incurred in the past by state-owned organizations and this was said to be at least $9.5 billion. Since
early 2015, domestic debt has increased by 12 per cent and external debt by 25 per cent.
In late 2016 the World Bank provided US$100 million in financing and the Japan International
Cooperation Agency provided a US$100M loan, both intended to "provide budget financing and to
support reforms in competitiveness, transparency, public sector and fiscal management", according to
the World Bank. The bank also reported that the country's government had agreed that there was a
need for reforms "in the areas of fiscal operations, competitiveness and governance" and if fully
implemented, "these could help the country reach Upper Middle-Income status in the medium term"
according to the bank.
In November 2016, the International Monetary Fund reported that it would disburse a higher amount
than the US$150 million originally planned, a full US$162.6 million (SDR 119.894 million), to Sri
Lanka. The agency's evaluation was cautiously optimistic about the future: "While inflation has
abated, credit growth remains strong. The central bank indicates its readiness to tighten the monetary
policy stance further if inflationary pressures resurge or credit growth persists. The authorities intend
to continue building up reserves through outright purchases while allowing for greater exchange rate
flexibility. The banking sector is currently well capitalized. Steps are being taken to find a resolution
mechanism for the distressed financial institutions. Going forward, there is a need to strengthen the
supervisory and regulatory framework, and identify and mitigate vulnerabilities in the financial
sector, particularly with regard to non-banks and state-owned banks."
As part of the debt management program, the Sri Lankan government carried out several reforms
which included the implementation of a new Inland Revenue Act as well as an automatic fuel pricing
formula. Tax reforms also increased VAT rates and narrowed exemptions and the third review by the
IMF noted that performance was on track regarding fiscal consolidation, revenue mobilization,
monetary policy management, and reserves accumulation. In the fourth review in June 2018, the IMF
claimed that "Sri Lanka has made important progress under its Fund-supported program", but stressed
the need for further progress with revenue-based fiscal consolidation and a prudent monetary policy
with sustained efforts to build up international reserves. In 2018 China extended a loan of $1.25
billion consisting of a below-market-rate syndicated loan and smaller Panda bond to bail out Sri
Lanka.
In 2021, Bangladesh agreed to give Sri Lanka loans of at least $200 million from the foreign
exchange reserves under a currency swap deal. The currency swap initiative was taken after Sri
Lankan Prime Minister Mahinda Rajapaksa’s visit to Bangladesh to attend the joint celebrations of
the golden jubilee of Bangladesh's independence and the birth centenary of Bangabandhu. In
December 2021, Sri Lanka announced that it would pay off a $251 million oil debt to Iran by sending
$5 million worth of Ceylon tea every month.

Table: Sri Lankan GDP & US Dollar Exchange Rate

 Table: Export-Import Stats on YoY basis

Table: Major Trading Partners of Sri Lanka

 Corrective Actions

• Sri Lanka should examine and reconstitute the legal, constitutional, and institutional structures
to enforce effective budget monitoring, parliamentary oversight, transparency, and
accountability.
• State intervention in Sri Lanka’s economic activity is high. State-imposed prices have also
impeded the development of free markets in the country. Reforming SOEs through divestiture,
downsizing, and closure will immediately improve investor confidence and signal that the
country is serious about reforms.
• Sri Lanka’s tax structure is highly regressive, relying excessively on indirect taxes. This type
of tax regime is woefully inadequate to meet the needs of a nation on its development
trajectory, necessitating reforms for a progressive tax structure.
• Transparent and simplified tariff structures on customs, removal of tariffs on raw materials
used in production, and improved trade facilitation will improve Sri Lanka’s trade
competitiveness and market access and allow, over time, the country to achieve a sustainable
current account balance.

Conclusion

Experts opine that Sri Lanka’s forex reserves have reached bottom-low and it faces mounting
challenges in the form of rising unsustainable public debts, low international reserves and the need for
large financing in coming years.
Thus, there is a need for ambitious fiscal consolidation based on high-quality revenue measures,
raising income tax and VAT rates and minimising exemptions, complemented with revenue
administration reform. Overall, the nation requires immediate economic reforms to have stable
economic health in the long run.

References

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5) https://www.yourarticlelibrary.com/economics/factors-that-influence-the-economic-
development-of-a-country/5942
6) https://en.wikipedia.org/wiki/Financial_crisis
7) https://www.investopedia.com/terms/f/financial-crisis.asp
8) https://www.igi-global.com/dictionary/economic-crisis/47360
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11) https://en.wikipedia.org/wiki/Sri_Lanka
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