Sri Lanka Economic Crisis

Why in the News?

Recently, the Prime Minister Ranil Wickremesinghe has been sworn in as the interim president of Sri Lanka hours amid on going economic crisis in Srilanka.

What caused Economic crisis in Sri Lanka?

• Dip in Foreign Exchange Reserves: Forex reserves dropped from over $7.5 billion in 2019 to around $2.8 billion due to an underperforming tourism sector in July 2021.
• Hasty Switch to Organic Farming: The Government’s blanket ban on the use of chemical fertilisers in agriculture has further worsened the crisis by dampening agricultural production which in turn caused a steep rise in the prices of essential commodities.
• Dependence on Imports: Sri Lanka’s high dependency on imports for essential items has worsened the economic meltdown as it lacks foreign reserves to pay for its import bills.
• Russia-Ukraine war-induced inflation: The ongoing Russia-Ukraine war resulted in steep price inflation of crude oil, sunflower oil, and wheat.
• Sharp fall in FDI: The FDI in the country has drastically decreased under the rule of the former President Gotabaya Rajapaksa.
  • According to government data, FDI stood at $548 million in 2020 compared to $793 million and $1.6 billion in 2019 and 2018, respectively
• Reduction of tax rates in 2020 Ending reduced revenue of government.

Conclusion:

• The current Sri Lankan economic crisis is the product of the historical imbalances in the economic structure, the IMF’s loan-related conditionalities, misguided policies of authoritarian rulers, and the official embrace of pseudo-science.