Economic and political crisis in sri-lanka lessons for bangladesh and other

developing nations.

Introduction: The crisis is said to have begun due to multiple compounding

factors like tax cuts,money creation , a nationwide policy to shift to organic or
biological farming, the 2019 sri-lanka easter bombings, and the impect of the
covid-19 pandemic in sri-lanka. The subsequent economic hardships resulted in
the 2022 sri-lankan protests. Sri Lanka had been earmarked for sovereign default,
as the remaining foreign exchange reserves of US$1.9 billion as of March 2022
would not be sufficient to pay the country's foreign debt obligations for 2022, with
$4 billion to be repaid. An International Sovereign Bond repayment of $1 billion is
due to be paid by the government in July 2022. Bloomberg reported that Sri Lanka
had a total of $8.6 billion in repayments due in 2022, including both local debt and
foreign debt.In April 2022, the Sri Lankan government announced that it was
defaulting, making it the first sovereign default in Sri Lankan history since its
independence in 1948 and the first state in the Asia-Pacific region to enter
sovereign default in the 21st century.

In June 2022, then Prime Minister Ranil Wickremesinghe said in parliament that
the economy had collapsed, leaving it unable to pay for essentials.

Background of sri-lanka: Occupied by the Portuguese in the 16th century and by

the Dutch in the 17th century, the island was ceded to the British in 1796, became
a crown colony in 1802, and was united under British rule by 1815. As Ceylon, it
became independent in 1948; its name was changed to Sri Lanka in 1972.
The history of sri-lanlais intertwined with the history of the broader Indian
subcontinent and the surrounding regions, comprising the areas of South
Asia, Southeast Asia and Indian Ocean.
The early human remains found on the island of Sri Lanka date to about 38,000
years ago (Balangoda Man).
The historical period begins roughly in the 3rd century, based on Pali chronicles
like the Mahavansa, Deepavansa, and the Choolavansa.They describe the history
since the arrival of Prince Vijaya from Northern India.The earliest documents of
settlement in the Island are found in these chronicles.These chronicles cover the
period since the establishment of the Kingdom of Tambapanni in the 6th century
BCE by the earliest ancestors of the Sinhalese. The first Sri Lankan ruler of
the Anuradhapura Kingdom, Pandukabhaya, is recorded for the 4th century
BCE. Buddhism was introduced in the 3rd century BCE by Arhath Mahinda (son
of the Indian emperor Ashoka).
The island was divided into numerous kingdoms over the following centuries,
intermittently (between CE 993–1077) united under Chola rule. Sri Lanka was
ruled by 181 monarchs from the Anuradhapura to Kandy periods. From the 16th
century, some coastal areas of the country were also controlled by
the Portuguese, Dutch and British. Between 1597 and 1658, a substantial part of
the island was under Portuguese rule. The Portuguese lost their possessions in
Ceylon due to Dutch intervention in the Eighty Years' War. Following
the Kandyan Wars, the island was united under British rule in 1815. Armed
uprisings against the British took place in the 1818 Uva Rebellion and the
1848 Matale Rebellion. Independence was finally granted in 1948 but the country
remained a Dominion of the British Empire until 1972.
In 1972 Sri Lanka assumed the status of a Republic. A constitution was introduced
in 1978 which made the Executive President the head of state. The Sri Lankan
Civil War began in 1983, including Insurrections in 1971 and 1987, with the 25-
year-long civil war ending in 2009. There was an attempted coup in 1962 against
the government under Sirimavo Bandaranaike.

Present status of Economy: The free-market economy of Sri Lanka was worth
$84 billion by nominal gross domestic product (GDP) in 2019 and $296.959 billion
by purchasing power parity (PPP). The country had experienced an annual growth
of 6.4 percent from 2003 to 2012, well above its regional peers. This growth was
driven by the growth of non-tradable sectors, which the World Bank warned to be
both unsustainable and unequitable. Growth has slowed since then. In 2019 with an
income per capita of 13,620 PPP Dollars or 3,852 (2019) nominal US dollars, Sri
Lanka was re-classified as a lower middle income nation by the World Bank from
a previous upper middle income status.
Sri Lanka has met the Millennium Development Goal (MDG) target of halving
extreme poverty and is on track to meet most of the other MDGs, outperforming
other South Asian countries. Sri Lanka's poverty headcount index was 4.1% by
2016. Since the end of the three-decade-long Sri Lankan Civil War, Sri Lanka has
begun focusing on long-term strategic and structural development challenges. It
strives to transition to an upper middle-income country. Sri Lanka also faces
challenges in social inclusion, governance and sustainability.
Services accounted for 58.2% of Sri Lanka's economy in 2019 up from 54.6% in
2010, industry 27.4% up from 26.4% a decade earlier and agriculture 7.4%.Though
there is a competitive export agricultural sector, technological advances have been
slow to enter the protected domestic sector. Sri Lanka is the largest solid and
industrial tyres manufacturing centre in the world and has an apparel sector which
is moving up the value chain. But rising trade protection over the past decade has
also caused concern over the resurgence of inward looking policies. With the onset
of the COVID-19 pandemic, lingering concerns over Sri Lanka's slowing growth,
money printing and government debt has spilled over into a series of sovereign
rating downgrades. Import controls and import substitution have intensified after
heightened monetary instability coming from debt monetization. Sri Lanka has
been named among the top 10 countries in the world in its handling of the COVID-
19 pandemic. In 2021, the Sri Lankan Government officially declared the worst
economic crisis in the country in 73 years.Sri Lanka said most foreign debt
repayments had been suspended from April 12, after two years of money printing
to support tax cuts, ending an unblemished record of debt service.

Present status of politics: The 2022 sri-lankan political crisis is an ongoing

political crisis in Sri Lanka due to the power struggle between President Gotabaya
Rajapaksa and the Parliament of Sri Lanka. It is fueled by the anti-government
protests and demonstrations by the public due to the economic crisis in the country.
The anti-government sentiment across various parts of Sri Lanka has triggered a
state of political instability the country has not seen since the civil war.
The political crisis began on 3 April 2022, after all 26 members of the Second
Gotabaya Rajapaksa cabinet with the exception of Prime Minister Rajapaksa
resigned en masse overnight. Critics said the resignation was not valid as they did
not follow the constitutional protocol and thus deemed it a "sham", and several
were reinstated in different ministries the next day.There were even growing calls
on forming a caretaker government to run the country or for snap elections, but the
latter option was deemed unviable due to paper shortages and concerns over
election expenditure, which would often cost in billions.
Protestors have taken to streets to show their anger and displeasure over the
mismanagement of the economy by the government and the protestors urged the
President Gotabaya to immediately step down for a political change; he refused to
do so, later eventually fleeing to Singapore and resigning on 14 July.Main
opposition Samagi Jana Balawegaya had determined to abolish the 20th
amendment by bringing a private members Bill in order to scrap the executive
powers of Executive Presidency.
Reasons behind the fall of sri-lanka: The crisis is said to have begun due to
multiple compounding factors like tax cuts, money creation, a nationwide policy to
shift to organic or biological farming, the 2019 Sri Lanka Easter bombings, and the
impact of the COVID-19 pandemic in Sri Lanka. Sri Lanka (AP) — The South
Asian nation of Sri Lanka is experiencing an unprecedented economic collapse that
has pushed the government into a deep crisis. The island is struggling to import
basic necessities for its 22 million people because of diminishing foreign reserves
and crippling debt, spurring weeks of anti-government protests that recently turned
violent and led to the prime minister’s resignation.

Much of the public ire has been directed at President Gotabaya Rajapaksa and his
brother, former Prime Minister Mahinda Rajapaksa, who are blamed by critics for
leading the country into the economic crisis. The government needed to boost its
revenues, especially as foreign debt ballooned for big infrastructure projects, some
financed by Chinese loans But just days into his presidency, Rajapaksa pushed
through the largest tax cuts in Sri Lankan history.

The move sparked quick punishment from the global market. Creditors
downgraded Sri Lanka’s ratings, blocking it from borrowing more money as its
foreign reserves nosedived. Soon after, the pandemic hit, flattening tourism again
as debts mounted.

Then last April, Rajapaksa suddenly announced a ban in the import of chemical
fertilizers in a push to promote organic farming, but without proper planning. It
caught farmers by surprise, decimated rice crops and drove high the price of staple.

The Ukraine war has also increased food and oil prices globally, making imports
more unaffordable. The central bank said inflation was at 30% in April, with food
prices up nearly 50%.

The country’s foreign reserves have dropped below $50 million. This has forced
the government to suspend payments on $7 billion in foreign debt due this year,
with nearly $25 billion due by 2026 out of a total of $51 billion.

World perspective: “Sri Lanka’s economic collapse needs immediate global

attention, not just from humanitarian agencies, but from international financial
institutions, private lenders and other countries who must come to the country’s
aid,” they said in statement. The nine experts expressed alarm over record high
inflation, rising commodity prices, power shortages, a crippling fuel crisis and
economic collapse, as the country grapples with unprecedented political
turmoil. The situation was compounded by economic reforms such as deep tax cuts
and servicing debt payments, which ate into the country’s foreign exchange reserves

South asian perspective: Sri Lanka has a new president and prime minister – but
a change in who leads the crisis-hit South Asian nation alone will not solve the
country’s severe economic problems.

Ranil Wickremesinghe – who on July 20, 2022, was voted in by lawmakers to

replace fleeing former president Gotabaya Rajapaksa – and his appointed premier
Dinesh Gunawardena inherit an economy grappling with record inflation as high as
59%, a currency that has lost almost half its value since March 2022 and severe
shortages of daily necessities such as food and fuel. Nearly all economic activity in
the country has ground to a halt.

The government’s deficit is so large it can’t afford to pay public workers, and the
central bank has almost no foreign currency – needed to finance imports and pay
back foreign debt.

In short, Sri Lanka is facing an unprecedented economic crisis, placing tremendous

pressure on the new leaders to act fast to fix things.

As an economist and former official at the Central Bank of Sri Lanka, I believe the
path forward will be difficult. The country will need to break with past policies and
practices that put it in a financial hole while putting in place reforms to get the
economy back on track. In particular, there are four key economic challenges the
new government will have to address, though they’re all interconnected.

Effects and impact of the crisis: As foreign reserves dried up, Sri Lanka
defaulted on its $51 billion foreign debt in May. The government took steps to
restructure the debt with the International Monetary Fund (IMF), which in June
noted that significant progress had been made.
“Any response towards mitigating the economic crisis should have human rights at
its core, including in the context of negotiation with the IMF,” said Ms. Waris.
The issue of Sri Lanka’s rising institutional debt had been flagged in a report
issued following an expert visit in 2019.
The report found that debt repayments were the country’s largest expenditure, and
highlighted the need for complementary alternatives and pursuit of less harmful
policies.
Inflation hit a record high of 54.6 per cent this month, while food inflation rose to
81 per cent.
The experts said the “snowballing economic and debt crisis” was deepened by the
government’s hasty and botched agricultural transition, adding that the World Food
Programme (WFP) has launched an emergency response as nearly 62,000 citizens
are in need of urgent assistance.
The experts who issued the statement receive their mandates from the UN Human
Rights Council, which is based in Geneva.
They operate in their individual capacity and are neither UN staff, nor are they paid
for their work.

Lessons for other countries: Island nation Sri Lanka is sinking in the worst
economic crisis in its history. Ballooning foreign debt, low foreign -
exchange reserves, high inflation, shortage of food, fuel, medicine, and
other essential ite ms and long hours of loadshedding made citizens' life a
misery, without a ray of hope for a bailout thus far. The country has been
struggling to repay the maturing debts and finance the current -account
deficit that is getting bloated rapidly. For lack of f oreign currency, Lanka
struggles to import and pay for essential commodities. The government
even has to postpone school examinations due to shortage of paper.
Hospitals are running out of medicines. Extreme hardship and misery
affected people very badly. The Lankans are becoming increasingly
frustrated, and they are now on the street, which has eroded social order
and created huge economic and political crisis.Sri Lanka was a fast -
growing economy in South Asia, ahead of many South Asian countries
in many social indicators. To understand how Sri Lanka reached such a
devastating situation we need to look at the country's economic policies
taken by the present and past governments. The ongoing crisis is the
result of the policies made by the past governments, especially by the
Mahinda Rajapaksa regime between 2005 and 2015 and since 2019
onwards when another Rajapaksa family member, Gotabaya Rajapaksa,
came to power. During the period of Mahinda Rajapaksa, the
government took a number of ambitious projects with foreign loans, such
as Mattala Rajapaksa International Airport, Hambantota Port, and the
Colombo Port City Development project . However, most of these projects
failed to attract adequate private investment, generate business interest,
and incurred losses. Mattala Rajapaksa International Airport is mostly
empty, not even 5 per cent of its capacity is used. It has veritably become
a white elephant. Because of low returns, the government's capacity to
repay the loan has gone down and it is compelled to obtain more loans to
cover the losses, which has increased the debt burden further.

Second, resources are scarce, and they have alternative uses. Scarce
resources should be invested in such a way that gene rates maximum
benefits to society, both short- and long-term ones. Making investments
that are not economically viable can weaken the economy and increase
the risk of eroding social and political stability as happened in Sri Lanka
right now.

Moreover, overdependence on foreign loan can make a country

vulnerable .

Conclusion: one of the wrost economic crises in sri-lanka history is currently

under way. Large foreign debt,a lack of foreign currency reserves, high inflation, a
scarcity of food, fuel medicine ,and other necessities,as well as lengthy load
shedding,made life miserable for the populace. The nation has struggled to finance
the rapidly expending current account deficit as well as pay off maturing debts.
The nation has struggled to import and pay for basic necessities due to lack of
foreign currency. Due to a paper shortage,the government has even been forced to
postpone school exams. Medicines are also becoming scarce in hospitals.people
were severly affected by extream suffering. People in sri-lanka are becoming more
irate and are now on the streets,whivh has weakened social order.