2 years ago

Demystifying Sri Lankan crisis: Rumours and realties

Published :

Updated :

The ongoing 2021-2022 Sri-Lankan economic crisis is characterised by economic mismanagement, a rise in external debt, depleting foreign exchange reserves, a turmoil political system as well as events like the Easter bombings in 2019, and the impact of the COVID-19 pandemic.

Given the manufacturing of narratives in present times, a dominant explanation for the crisis in the mainstream media centres around the so-called debt crisis that China is accused of having set for Sri Lanka.

However, Chinese foreign debt in Sri Lanka is not more than 10 per cent in 2020. Moreover, Japan is the first country that is head over heels in foreign debt. In fact, Japan’s external debt accounted for 98.0 per cent of the country’s nominal GDP in 2021.

The Sri Lankan debt crisis is being mystified as a repercussion of Chinese debt. The aim is to discourage other developing states to take loans from China or take part in Belt and Road Initiative.

As an economy, Sri Lanka has transformed from a middle-income country to its present economic turmoil. It has happened in recent years in the context of a hostile geopolitical environment and a plethora of domestic political and economic challenges.

Dependency Syndrome

Sri Lankan strategic ambiguity to adopt a balanced foreign policy has an economic and political dimension. The political regime of Sri Lanka faced a see-saw game between China and Indian influence.

At the same time, it antagonised India and the West. India had been extremely influential in Sri Lankan politics during the post-colonial era to counter the rise of the Tamil liberation force.

This underlying dependency on foreign power did not lead Sri Lanka to exercise independent economic and political policymaking. Now it is facing the repercussion of the bandwagon with regional and global powers.

The scapegoat of geopolitical rivalry

Sri Lanka‘s strategic location is crucial in the Indian Ocean from a geostrategic perspective, numerous sea trade routes pass around Sri Lanka, in terms of shipping around two-thirds of the world’s oil and half of the world’s container shipment passes from the South of Sri Lanka.

The United States and India isolated Sri Lanka due to its involvement with China. It is one of the BRI signatories in Indo-Pacific region and reluctant to join Indo-Pacific strategy. The powerful states deliberately created hostile and aggressive environment for Sri Lanka.

Dependency on Narrow Economic Sectors

The Sri Lankan economy was highly dependent on sectors like agriculture, tourism and textile for its exports, therefore, lacks versatility in terms of production.

Tourism is the lifeline of Sri Lankan economy which has massively suffered firstly by series of bombing in 2019, COVID-19 global pandemic and the Ukraine crisis.

On the flip side, it imports most of the essential products like fuel, machinery, grain and paper and vegetable, fruits etc. 

Mountain of Foreign Debt

The Sri Lankan economy grew at a slower rate than anticipated in the fourth quarter of the 2021 fiscal year. The financial crisis stemmed from a critical shortfall in foreign currency reserves leaving traders unable to finance imports.

One of the root causes of the crisis lies in economic mismanagement by successive governments that created and prolonged a twin deficit – a budget shortfall alongside a current account deficit.

The foreign exchange reserve has fallen by 70 per cent in the past two years and was down to a paltry USD 2.31 billion as of February 2022, leaving Sri Lanka struggling to import essentials including food and fuel

Myopic Economic Policy

When the People Front came to power, it had two major electoral commitments to materialise - one was to cut down the taxes and the second was to provide concessions to the farmers.

The nation-building tax and the pay as tax and service charges were abolished. Earlier Mr Rajpaksa made public his plan to make Sri Lanka the first country in the world with an agriculture sector that is 100 per cent organic.

The tax cuts led to a loss of billions of rupees in tax revenues, putting further pressure on the public finance of the already heavily indebted economy.

 To cover the government spending, the central bank began printing money in record amounts ignoring the warning from IMF. Sri Lankan public debt which was already on an unsustainable path before the pandemic is estimated to have risen from 94 per cent of GDP in 2019 to 119 per cent of GDP in 2021.

Two shocks and a pandemic

First, there was a series of bomb blast in churches and luxury hotels. The Blast led to a huge international tourists fall out. Tourists’ arrivals fell by 71 per cent by the end of May 2019. The tourism industry, which represents over 10 per cent of the country’s Gross Domestic Product (GDP) and brings in foreign exchange, has been hit hard by the corona pandemic as well.                                                                        

As a result, foreign reserves have dropped from over USD 7.5 billion in 2019 to around USD 2.8 billion in July this year.

With the supply of foreign exchange drying up, the amount of money that Sri Lankans have had to shell out to purchase the foreign exchange necessary to import goods has risen. So, the value of Sri Lankan rupee has depreciated by around 80 per cent so far this year.

The disintegration of the socio-economic fabric

The minority Tamil population was seen as passive people not prone to violence. However, the ethnic conflict soon engulfed Sri Lanka as one of the world’s most violent and prolonged secessionist movements since World War II.

The Emergency was first imposed in 1958 after Sri Lanka embraced the Sinhala only language policy and off and on from 1971 onward.

When the left-wing Janatha Vimukhti Peramuna mounted its first insurrection, the Liberation Tigers of Tamil Elam (LTTE) was one of the dedicated soldiers who was recently defeated in 2009.

The underlying ethnic divide which propelled the rebel movement jeopardised the social fabric of Sri Lanka resulting in a chronic socio-political crisis.

The Western media tried to establish a narrative that Chinese debt is the taproot of the Sri Lankan crisis. They constantly highlight the issue of Hambantota port and Chinses lease.

The above-mentioned analysis suggests that the causes are diverse and complicated. It is far from the politics of the debt trap.

The writer is a research associate at the Centre for Bangladesh and Global Affairs

[email protected]

Share this news