No End in Sight

Despite the recent IMF bailout, the economic future of Sri Lanka looks uncertain.

By Daniyal Talat | June 2023

Sri Lanka is at a crossroads in its 75-year history. The country had its worst-ever crisis in 2022 as a result of years of economic mismanagement, poor governance, bad policy decisions, and the effects of global disasters like COVID-19 pandemic and the ongoing Russian invasion of Ukraine.

The poorest and most vulnerable people in Sri Lanka have suffered the greatest losses as a result of economic collapse and political upheaval. The vulnerability of Sri Lanka is exacerbated by frequent natural catastrophes. The severity of the crisis has demonstrated the country’s need for a new development strategy. However, the recovery process will not be easy, and a slew of harsh fiscal adjustment measures may be required. Sri Lanka urgently needs debt relief from its creditors and funding from foreign financial organizations.

The financial crisis has caused lasting wounds. According to a poverty line of $3.65 per person per day, the rate of poverty in Sri Lanka nearly doubled between 2021 and 2022, rising from 13 per cent to a startling 25 per cent. In 2023, the rate of poverty is expected to rise by more than 2 percentage points. Urban poverty quadrupled in that time, from 5 to 15 per cent. People in Sri Lanka have been forced to swiftly adjust to a new reality where options for a better future are few, chances for good work are rare, and earnings are reduced and degraded by inflation. According to Sri Lanka’s president, the country is “bankrupt.”

After going into default on its national debt in May 2022, the tiny nation in the Indian Ocean experienced economic and political upheaval. The Colombo government secured a $2.9 billion (£2.4 billion) bailout in principle from the International Monetary Fund (IMF) in September, 2022. The money won’t be provided to Sri Lanka, however, unless China and India, Sri Lanka’s sovereign creditors, agree to a restructure of the billions of dollars in bilateral debt they owe. Despite hopes that such an accord would materialize during the previous month, nothing has happened so far.

The main source of suffering is a trade imbalance, with the trade deficit presently running at 6 per cent of GDP annually and a dire need to increase exports. When you take into account how fiercely domestic markets are regulated, largely to preserve entrenched interests, you can certainly see why liberalizing the economy is necessary if you want to see some relief.

For several reasons, trade can be crucial for the economic growth of low-income nations. Trade enables low-income nations to reach new markets for their products and services, which can raise demand and accelerate economic growth. For instance, EU may give a preferred treatment to exporters from the low-income countries.

Opening up to free trade exposes low-income nations to more international competition, which may spur innovation and raise the standard of goods and services. Trade may assist low-income nations in diversifying their economies by reducing reliance on a small number of basic commodities and allowing them to access new markets. Through trade, low-income nations can get access to cutting-edge solutions, industry best practices, and leadership strategies that can boost their competitiveness and productivity.

Trade may open doors for investment from outside in low-income nations, which can supply the money, expertise, and technology necessary for economic development. Despite some risks, trade has the potential to be a significant force for economic growth and development in low-income countries, thereby assisting in the improvement of living conditions and the eradication of poverty.

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