Current Situation of Sri Lanka

The economic crisis that has befallen Sri Lanka has crippled the government, rendering it unable
to purchase for vital imports such as petroleum and leading to widespread shortages of essential
goods across the island country. The public indignation reached its zenith in a string of major
demonstrations that took place all throughout the country and culminated in violence and fights
with the police. The island nation of Sri Lanka is currently experiencing one of the most severe
economic downturns it has ever been subjected to. It just recently reneged on its foreign debts for
first time since the country gained its independence. As a result, the country's 22 million people
are now facing crippling power outages lasting anywhere from three to twelve hours, as well as
an extreme lack of food, fuel, and other necessities such as medicines (The Hindu, 2022).
Sri Lanka is in the midst of an economic crisis, which is partially the outcome of the country's
twin deficit economy. A nation is said to have a twin economy when its domestic expenditures
are higher than its national revenue. This leaves the nation vulnerable to incurring external debt
and dependent on the inflow of money from elsewhere. In order to meet the costs of providing
public services over a period of several years, the government has been successful in obtaining a
number of loans from various international organizations and other nations. Tourism in the
region has also been suffering due to a number of other concerns. At first, a string of terrorist
assaults on churches and hotels began to have an effect on the industry (which was responsible
for 5.6% of the country's gross domestic product). After that, in 2020, a pandemic caused by
COVID-19 stopped people from traveling. The conflict between Russia and Ukraine, which
broke out in 2022, was fought between two of the nations that account for the majority of tourists
visiting the country. The government of Sri Lanka also implemented a restriction on the use of
fertilizers in 2021, which resulted in a major decrease in the country's output of rice and tea, both
of its primary export items. In May of 2022, the nation made the announcement that it would be
postponing the payment of the foreign debt that was due that year. Since 2019, the government
of Sri Lanka has decreased several taxes in an effort to promote the economy; however, this
choice has instead significantly lowered the country's earnings. Because of these factors, the
government was forced to reduce its reserves by seventy percent in just two years in order to pay
off some of the country's debts. As a result, the country was left without sufficient funds to pay
actors for only certain product lines, such as oil, which resulted in a shortage throughout the
nation. Additionally, the value of the Sri Lankan rupee has dropped precipitously, which has led
to an increase in the cost of living for the country's population (jagranjosh.com, 2022).
The country's monthly inflation rates reached an all-time high of 39.1 percent in May 2022,
having risen from 3 percent in January 2021. This was the highest inflation rate ever recorded. In
the midst of the ongoing economic crisis in March 2022, the government declared that there
would be a blackout lasting for thirteen hours. After the power went out, a large number of
individuals demonstrated their discontent with the current economic situation in the streets. Since
that time, there have been scattered demonstrations taking place all around the country. The
public as a whole is having their day-to-day lives impacted by the economic crisis. There have
been reports of medicine shortages in hospitals, price increases have rendered some members of
the population unable to buy food, and some people have even begun to flee to India in an effort
to escape the impact of the crisis. Because of the ban on artificial fertilizers, food supply in 2022
has been lower than usual, which is likely to limit food supplies for several months at a
minimum. Additionally, the nation does not have enough foreign currency reserves to import the
necessary food supply, and it has not been able to live up to its pledges regarding its external
debt. Its foreign exchange holdings are now below $2 billion, compared to approximately $7.5
billion earlier this year. In May of this year, Sri Lanka defaulted on its approximately $50 billion
in external debt for the first time, and as a direct result, the country's government is now facing
increased costs associated with borrowing money. While the government of Sri Lanka is in talks
with the International Monetary Fund (IMF) about a larger bailout, India has granted the
beleaguered nation significant assistance in the form of credit lines, with the total amount
exceeding $3.5 billion for this year. In addition, help is guaranteed from China. There have been
many economies throughout history that have had difficulties similar to those that are currently
being experienced by Sri Lanka, such as rising inflation, a lack of critical products, depleting
foreign currency reserves, defaulting on sovereign debt, and so on. And despite the grim
appearance of things, there remains hope that Sri Lanka's economy can be stabilized with the
implementation of a few straightforward changes.
Current Leadership
After President Mahinda Rajapaksa and his administration have resigned from their positions of
power, Sri Lanka will be able to take steps toward establishing a government that is more
democratically and representative of the country's varied population. Sri Lanka is a country that
is home to people from a diverse range of ethnic backgrounds, including Muslims from Tamil,
Buddhists from Sinhala, and many others. However, according to Al Jazeera, the Rajapaksa
administration has a long history of being guilty for orchestrating state-controlled violence and
persecution against Tamil protestors in Sri Lanka. A political leadership that does not take
account the concerns and lived reality of all of its constituents is a political leadership that cannot
legitimately prepare its economy for diversity nor truly helps end Sri Lanka's economic crisis.
Reasons Behind the Economic Crisis
Experts in economics and policy are in agreement that the global financial situation in Sri Lanka
is the result of poor management of the country's finances by previous administrations, as well as
poorly timed tax cuts, which have been aggravated by the pandemic caused by the Covid-19
virus. The budget deficit and the current account deficit that the nation is currently suffering are
the twin deficits that are at the heart of the dilemma that the nation is currently facing. Any
nation's monetary and fiscal wellbeing will suffer severely as a direct result of this development.
The country's current economic predicament can be traced back to factors such as an economy
that is dependent on the export of primary products such as tea, rubber, and garments, while
essential usage items such as food and fuel are started importing into the country. These factors
are the roots of the current crisis that the country is experiencing. Exports from the primary
community and tourism together help the nation bring in much-needed revenue to bolster its
foreign exchange reserves. Following the terrorist attacks that occurred during Easter of that year
in the country, the tourism industry, which is a significant component of the economy and began
to drop in 2019, while exports and revenue for the government were already on the slide,
continued to decline. The epidemic known as Covid-19 arrived soon after this. In both 2020 and
2021, the government had a deficit that was more than ten percent of GDP, and the ratio of
public debt to GDP increased from ninety-four percent in 2019 to one hundred twenty percent in
2021. As a result of the pandemic caused by the COVID-19 virus, hundreds of Sri Lankan
laborers who had been working in West Asian countries were forced to return home jobless
following the initial wave of the pandemic. Because of the outbreak of infections in clusters,
textile mills and tea estates in Sri Lanka were unable to function properly, and thousands of
people in the cities lost their employment as a result of businesses suddenly closing their doors or
laying off their employees (The Daily Guardian, 2022).
The country's determination to transition to organic farming is also a significant factor that
contributed to the current predicament. The majority of the fertiliser used in the country was
brought in from other countries, and the government used to spend approximately $ 260 million
on subsidizing its use. On the other hand, in May of 2021, it was announced that the nation will
totally transition to organic agriculture and that it would prohibit the import of fertilizers. The
poor timing of the policy, which was enacted in an effort to protect the country's reserves of
foreign currency, had a devastating effect on the production of farm products, which resulted in
an increased requirement for the importation of various food items. Because of the cumulative
effect of these factors, virtually all of the important economic sectors that earn foreign currency,
including as exports, remittances, and tourism, have been severely impacted, which has resulted
in a significant deficiency in the country's reserves of foreign currency. It was necessary for the
country to have these reserves in order to be able to purchase for critical products like food and
gasoline, both of which are imported into the country.

The Effects of COVID-19

The COVID-19 pandemic also caused Sri Lanka's economic disaster. Sri Lanka is a top travel
destination. Due to COVID-19 incidents that first revealed in Sri Lanka in March 2020, travel
restrictions have damaged the tourism industry, decreasing the number of tourists from 1.9
million in 2019 to 570,000 in 2020, thereby cutting off earnings from the country's third-largest
market. Along with the drop in foreign visitors, the Global Trade Administration reported a $60
million drop in funding for new seaside resorts and hotels in 2020 (Deyshappriya, 2020).

Currency Reform
Reforming the country's monetary system is the single most significant action that the
government of Sri Lanka can do to bring an end to the crisis. It is important to keep in mind that
money is the lubricant that keeps the wheels of business turning in any economy. And when
there is very little confidence in the value of a country's money, the majority of people living in
that country will be reluctant to trade their goods and services in return for the currency. They
might decide to utilize gold or barter instead, or they might employ alternative currencies. The
inflation rate in Sri Lanka is expected to hit 40 percent in the near future, according to
projections made by the country's central bank, which believes that it was somewhere around 30
percent year-over-year in April. However, estimates from non-governmental economists suggest
that prices from across economy have over nearly doubled year, and they predict that the
situation is likely to become much more dire in the years to come. When a nation's currency is
depreciating at such a rapid pace, it is unrealistic to anticipate that the economy will continue to
operate normally. People will not be willing to produce and sell goods in exchange for a
currency if they cannot be reasonably certain about the future value of that currency. This is
because the currency's purchasing power is in serious doubt when people cannot be reasonably
certain of future value of their currency. This has the potential to bring about a precipitous fall in
the economy overall (Kararach, George, Kadenge, & Guvheya, 2019).
It is important to highlight that the Central Bank of Sri Lanka did nothing more than watch
helplessly as inflation spiralled out of control. In point of fact, it was more than happy to
manufacture brand new rupees out of thin air in order to satisfy the spending requirements of the
Sri Lankan government. Because of this, the amount of money available in the market increased
at a quick pace, which in turn prompted a sharp spike in the prices of goods throughout the
economy. The task that lies ahead for the Central Bank of Sri Lanka is to convey assurance to the
public that it will not voluntarily increase the amount of money available in the economy. To
achieve this goal, the supply of the Sri Lankan rupee could be restricted by linking it to a
commodity, such as gold, or at the at least, to a more powerful currency, such as the US dollar.
This would encourage productive economic activity by assuring both regular citizens and
entrepreneurs that the value of the Sri Lankan rupee would stay steady over time. In the
meantime, many economic commentators have pointed the finger of blame at the massive tax
cuts in 2019 granted by the government of Gotabaya Rajapaksa for the current state of the
economy and have asked that taxes be raised in order to bring the budget of the government back
into balance. However, increasing taxes on an economy that is currently experiencing a severe
crisis will only serve to discourage economic growth and exacerbate the current state of the
economy.
Price Controls
Sri Lanka must abandon price caps to escape its economic problems. The government has set
price caps on many goods, including food and fuel, in an effort to maintain price stability. Price
ceilings make it difficult for producers to produce things when the cost of the inputs is high. In
order to meet the growing demand for electricity in Sri Lanka, the country's power firms have
requested an increase in pricing equivalent to 800 percent. It's great that the government is letting
gasoline prices go up by 22 percent, but ultimately, all pricing ought to be freed from
government control. Price caps lead to shortages because they prevent businesses from selling
their wares at prices that would clear the market. Pricing in the market gives investors direction
as to where they should put their limited capital. When pricing is deregulated, it will send a
message to business owners to produce more food and other necessities. The costs of essential
goods will fall as a result of business people’s responses to price signals and increased supplies,
which will make them more accessible to the general public (The Week, 2022).
Following the implementation of price reforms, the Sri Lankan rupee should be able to discover
its true value in relation to the US dollar. The Sri Lankan central bank has enabled a depreciation
of the rupee in relation to the United States dollar. Many people believe that the current
exchange rate of 370 rupees to one dollar is both unsustainable and harmful. The Central Bank of
Sri Lanka uses its cash reserves to keep the rupee at an artificially high value. Because it does
not have enough dollars to prop up the rupee, the government has resorted to imposing bans and
many other restrictions. It is possible that the actions of Sri Lanka's central bank, which made it
illegal to pay more than the allowed currency value to import goods, contributed to the country's
worsening economic situation. The post-war economic revival in Germany was driven in large
part by fluctuating currencies and a loosening of pricing controls. The economy of Sri Lanka
should see some improvement as a result of similar initiatives.

Solutions and Reforms Going Forward

In order to accelerate the rate of economic expansion in Sri Lanka, significant monetary policy
adjustments are required. According to a research put out by the World Bank, there are four
primary steps. The stages include increasing agricultural output, expanding job prospects in non-
farming sectors, improving the execution of reforms to stimulate safer, more productive labour,
and improving access to benefits and education across the country (Borgen, 2022).
As a further component, the expansion of the business of exporting goods through the provision
of specialized support from the government in the form of priority given to the uninterrupted
operation of exporting goods without any disruptions caused by the import of gasoline, gas, or
any other goods.
Instead of investing in methods of making artificial fertilizer less likely to cause damage to the
environment, one of the primary ways to resolve a significant portion of the economic strain that
the country is experiencing is to roll back the policy regarding manure that was put into place by
President Rajapaksa. As a second thing to consider, investing in jobs that are not related to
farming primarily involves looking at the expansion of resorts and tourism in Sri Lanka.
According to the Global Trade Association, a number of companies, including Hilton, Shangri-
La, and Movenpick, have started further hotel and resort construction projects in Sri Lanka in
order to bring in more international clients and generate more revenue for the country.
According to the third point, the feature of informality, also known as the kind of labour that is
not reported, is prone to having lengthy hours that are not regulated, as well as poor pay and low
levels of productivity. This can be mitigated by the establishment of a robust social network of
health insurance providers so that periods of economic crisis do not provoke unrest in Sri Lankan
homes. The fourth point argues that expanding the amount of state funding available for
education will enable more people in Sri Lanka to improve the level of industrialization in the
agricultural and tourism industries by making use of the skills they have acquired.
Hope Moving Forward
There are many reasons to have faith that Sri Lanka's current economic crisis will be resolved,
and that the aforementioned beginning principles will be essential in the development of a
strategy for the country's continued economic expansion. Sri Lanka had already begun to take
measures to reduce poverty in the decades leading up to the COVID-19 pandemic, as evidenced
by a 5.2 percent decrease in the incidence of poverty by the year 2016, the achievement of nearly
universal access to electricity, and labour growth in non-farming sectors. One reason for this is
that COVID-19 is a virus that spreads through infected mosquitoes. Instead of removing the
artificial fertilizer, the next step is to continue reimbursing farmers and making improvements to
farming technology. The current economic problem in Sri Lanka should resolve itself over time
if the country adopts democratic leadership and passes more nuanced labour legislation.

References
Borgen. (2022). How to Help End Sri Lanka’s Economic Crisis. Retrieved from
https://www.borgenmagazine.com/end-sri-lankas-economic-crisis/

Deyshappriya, N. P. (2020). Economic impacts of COVID-19 macro and microeconomics evidences from
Sri Lanka. Economic Impacts of COVID-19 Macro and Microeconomics Evidences from Sri Lanka .

jagranjosh.com. (2022). Why is Sri Lanka Under Its Worst Economic Crisis? Check Reasons & Latest
Updates! Retrieved from https://www.jagranjosh.com/general-knowledge/what-is-the-reason-
for-sri-lankas-economic-crisis-1648126383-1

Kararach, George, Kadenge, P., & Guvheya, G. (2019). Currency reforms in Zimbabwe. An analysis of
possible currency regimes.

The Daily Guardian. (2022). THE SRI LANKAN ECONOMIC CRISIS EXPLAINED. Retrieved from
https://thedailyguardian.com/the-sri-lankan-economic-crisis-explained/

The Hindu. (2022). Getting Sri Lanka out of the economic mess. Retrieved from
https://www.thehindu.com/opinion/op-ed/getting-sri-lanka-out-of-the-economic-mess/
article65578718.ece

The Week. (2022). Explained: Sri Lanka's economic crisis. Retrieved from
https://www.theweek.in/news/world/2021/09/13/explained-sri-lankas-economic-crisis.html