The people of Sri Lanka have no choice but to endure economic hardship for a few more years.
Last year, Sri Lanka experienced the deepest economic crisis of its post-independence history. Public anger against prolonged power outages, and shortage of consumables finally spilled over onto the streets. Ensuing violent protests swept away the elected president Gotabaya Rajapaksa along with a string of political heavy-weights. A state of total anarchy was only averted when presidential powers were hastily transferred to Ranil Wickremesinghe.
Sri Lanka was already facing economic problems for the past few years. The central bank had foreseen an economic meltdown, and informed the government about an impending disaster. However, the government turned a blind eye and continued with its suicidal borrowing practices. The borrowed money was largely spent on distributing political handouts. Economic policies introduced by the then president Gotabaya Rajapaksa after assuming power in 2019 further accelerated the demise of Sri Lanka’s economy. He introduced politically motivated tax cuts, adversely affecting government revenues, and increasing the budget deficit. To fund this deficit and finance public spending, the central bank started printing new currency notes despite warnings from the International Monetary Fund (IMF). This was a recipe for disaster, as the market imploded with cash followed by hyperinflation and fiscal collapse.
During the Covid-19 pandemic in 2021, while the debt crisis was brewing, another big source of revenue dried up as tourism came to a screeching halt. Last year, the Russia-Ukraine conflict put the final nail into Sri Lanka’s financial coffin. Tea exports to Russia – another source of income - dried up. Debt began accumulating. The structure of Sri Lanka’s exponential debt was not sustainable in the long run. Around half of the entire external debt is short-term in nature secured from private creditors. These debts are exposed to the risk of capital flight and interest rate volatility.
The central bank maintained strict control over foreign exchange keeping the value of US Dollar pegged at 200 rupees but the market value of the dollar exceeded 245 rupees. Due to this difference in value, Sri Lankan workers in Western countries started sending back remittances through unofficial channels rather than banks, thus depriving them of much-needed dollars.
As the country desperately tried to stay afloat confronting multiple crises, in April 2021, Gotabaya Rajapaksa came up with another novel idea to switch towards organic agriculture. The policy took effect in April 2021, and immediately became a disaster. Within a span of only six months, Sri Lanka turned from a self-sufficient rice producer into an importer of the essential staple food. The organic policy decreased agricultural yield by half and raised farming cost manifold. The economic impact of Rajapaksa’s ill-conceived policies began to hurt badly.
By March 2022, people were on the streets demanding resignations from Rajapaksa and his family members. Initially, the government tried to suppress popular dissent through intimidation and violence. The strategy backfired, and paved the way for the ouster of the incumbent president. Gotabaya Rajapaska and his wife fled the country on July 13, 2022. He served his resignation the following day through an email. Ranil Wickremesinghe was appointed two days later as the interim president.
The writer is a freelancer and an investment banker based in Karachi. He can be reached at firstname.lastname@example.org
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