Course: Pol 101

Section: 24

Semester: Fall 2022

Group report on:

Economic crisis in Sri Lanka
Date of submission: 17.12.22

Submitted to:

Professor Dr. Abul Kalam Azad (Klm)

Department of Political Science & Sociology (PSS)
North South University

Submitted by:

Names ID
Monayam Shariar Nabil 2012140030
Daiyan Shahriar 2011112030
S. T. A. Mahmud Tonmoy 2011105042
Faiza Tasnim Zaman 2031136630
Nur Afrin Chowdhury Ananna 2111156630
Pol 101 Economic crisis of Sri Lanka

TABLE OF CONTENTS

INTRODUCTION ................................................................................................ 1

BACKGROUND .................................................................................................. 1

WHAT CAUSED THE CRISIS ? ........................................................................ 3

HOW THE CRISIS HAS BEEN AFFECTING SRI LANKA ............................. 4

ECONOMIC ......................................................................................................... 4
SOCIAL ............................................................................................................... 5
ENVIRONMENTAL ............................................................................................... 5

HOW SRI LANKA HAS BEEN DEALING WITH THE CRISIS ..................... 6

LESSONS LEARNT FROM THIS CRISIS ........................................................ 7

REDUCING GOVERNMENT EXPENDITURE............................................................. 7

PRECAUTIONS IN DEBT MANAGEMENT ................................................................ 7
IMPORTANCE OF GOVERNMENT TAX COLLECTION .............................................. 7
BE CAREFUL IN USING FOREIGN CURRENCY ....................................................... 7
INCREASING ORGANIC FARMING ........................................................................ 7

RECOMMENDATION ........................................................................................ 8

CONCLUSION .................................................................................................... 9

REFERENCES ................................................................................................... 10
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Pol 101 Economic crisis of Sri Lanka 1

INTRODUCTION
The South Asian Island nation, Sri Lanka is currently facing a dire economic and political
crisis. Extensive corruption and persistent financial mismanagement have brought the country
to the brink of collapse. Huge inflation, weak government finance, and one of the reasons for
this disaster is the economy affected by Corona, so the tourism industry, one of the main
sources of revenue for the Lankan government, has collapsed and foreign remittances have
reached the bottom. And due to this, the prices of daily commodities have increased greatly in
a few months. In this country of a 2-crore population, people's life is disrupted due to the
increasing prices of daily commodities. Also, Sri Lanka has to depend a lot on imported goods,
food, fuel, and medicines. Sri Lankan citizens are even forced to buy fuel in exchange for
money. So, several wrong decisions of the government created a double deficit in the country
and gradually turned into a chronic deficit. Bangladesh has a lot to learn from this incident so
that it can prevent such crisis from ever happening.

BACKGROUND
Sri Lanka has always been a talk of the town regarding economic mismanagement and various
political turmoils. The current state of Sri Lanka has been a product of the various issues
stemming from the year 2009 to till date. In the year 2009, the civil war of long decade was
finally put off, and the Sri Lankan Government could focus on their country and its production.
However, the Government had always put more emphasizes on its own domestic production
and selling in the domestic market, they never stressed upon exporting anything overseas. This
resulted in an increase in demand for imported goods, but there was no balance in import and
export, Sri Lanka was importing more than it was exporting, thus emptying its foreign reserve.
Fast forward to the year 2019, the then Sri Lankan Government decided to cut off income tax
without any preplan, and this further reduced the government revenue leading to further havoc
and creating losses, this also fueled up a cut in various infrastructural and government subsidies
plan. The country has always emphasized on tourism, and most of their foreign currency came
off from tourism, but when in 2020 the pandemic hit, tourism industry completely shut down,
which caused further tension in Sri Lanka, and increased unemployment due to closure of many
tourists’ spot and hotels. In 2021, the foreign reserve of Sri Lanka was emptying out, and to
protect it, the government imposed a ban on foreign import of chemical fertilizers, and these
were essentials to grow crops. The absence of imported fertilizers caused difficulty in the
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Pol 101 Economic crisis of Sri Lanka 2

production of crops, and this led to a massive shortages of food supply in Sri Lanka and the
country had to rely on crop imports from overseas which drained the foreign reserve. (Sri
Lanka: Why Is the Country in an Economic Crisis? - BBC News, n.d.) Immediately after this
in 2022, the furious Citizens came on the road and started protesting against their President and
for his resignation, and eventually he stepped down to cool down the situation. Right around
the corner when Sri Lanka thought things will be alright, the Russia-Ukraine war led to an
increase in fuel price and caused a hike in grain price as well, which further put more pressure
on Sri Lanka, and finally lead it to fully collapse and be shredded into tatters. All of the events
on after another lead to a massive economic crisis in Sri Lanka. (Koop et al., 2022)
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Pol 101 Economic crisis of Sri Lanka 3

WHAT CAUSED THE CRISIS?

A series of bad decisions and one life threatening virus caused the crisis in Sri Lanka.
Firstly, Sri Lanka reduced income tax which in return also reduced the governments revenue.
Sri Lanka was relying on new loans, alongside revenue from its truism industry and
international remittance to pay down its debts. Also known as ‘Debt rollover strategy’. This
strategy was working fine for them. Tourism is the country’s most lucrative industry which
contributed almost 5% of the country’s GDP. Then came corona virus, which dropped the
tourist share of GDP from 5% to less than 1% (0.8%). Because of covid the country became
unable to pay for esse3ntial imports and pay its debts. also known as balance of payment crisis.

Secondly, former president Gotabaya Rajapaksa announced a ban on pesticides, herbicides

and fertilizers on April of 2021. That was done to prevent foreign reserves from depleting.
However, this decision ended up further depleting their foreign reserves as farmers didn’t have
fertilizers. Therefore, they had to import essentials materials. This is when the crisis really
began. People started protesting, the govt couldn’t pay for anything. which leading to shortages
in life saving mediacies. so much so that the doctors warned that the crisis could end up killing
more people that the virus. It also led to shortages in food. according to the UN more than 3
quarter of the population had reduced their food intake.

Finally, the government made the worst decision in my opinion. Sri Lanka printed money to
pay for goods which lead to inflation spiking above 50%. At first the government could not
pay for anything, now the citizen could not pay for anything either. Which was the tipping
point of this crisis. Finally in July, after massive protests Former president Gotabaya Rajapaksa
was forced to flee the country. But the crisis still continues. In his place, former prime minister
Ranil Wickremesinghe was given the role of acting president of Sri Lanka. Now the new
government of Sri Lanka is doing what they can to save themselves from this situation.
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Pol 101 Economic crisis of Sri Lanka 4

HOW THE CRISIS HAS BEEN AFFECTING SRI LANKA

Economic
The 22-million-person island nation of Sri Lanka in the tropical Indian Ocean was once a role
model for developing nations. Due to its unmanageable debt load and severe balance of
payments issue, Sri Lanka is experiencing slow economic growth and widespread poverty.
(The World Bank, 2022). Sri Lanka is on track to receive a $2.9 billion loan from the
International Monetary Fund. However, Sri Lanka must restructure its loans with China and
other creditors. Sri Lanka's reputation as a South Asian success story has been shattered by a
deadly confluence of dictatorship, polarizing politics, persecution of minorities, and terrible
economic policies. The country has suffered significantly as a result of the Covid epidemic as
they were heavily dependent on tourism, trade, and remittance. (Bonner, 2022)
Economic Indicators Pre-Economic Crisis Post-Economic Crisis
Economic growth 1.2% -14.8%
Inflation rate 3.53% 64.3%
Poverty rate 8.9% 25%
Unemployment rate 4.35% 5.40%
Official reserves $7.6 billion $1817 million
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Pol 101 Economic crisis of Sri Lanka 5

Social
People in Colombo were having a hard time getting by on shrinking earnings, with inflation
over 50%, and some essentials being nearly unaffordable. Few claimed they had made cuts,
were only eating two meals per day, and were taking out loans to cover necessities like rent
and energy bills. Others had trouble affording the medication that the government had
previously provided during covid 19. Due to fuel shortages, schools had to close for a month
and didn't resume until July 25. Although many teachers offered their classes online, many
parents could not afford to give their kids access to the internet. (Sri Lanka, 2022).
To understand the struggle of people better, a street sweeper joined the protest with her infant.
She said, “When the baby was born a bar of soap cost 80 rupees, now it’s 210.”

Environmental
Living conditions on the island have been substantially worsened by unplanned organic
farming implementation, unsustainable Chinese investments, the price increase brought on by
the Ukraine war, a shipping tragedy that continues to contaminate coastal areas. Under former
President Gotabaya Rajapaksa, the government announced an ambitious program in 2019,
transitioning to organic farming over a 10-year period and outlawing artificial fertilizers. The
farmers lacked the tools necessary to quickly transition to organic farming. For the majority of
farmers, this decision had terrible results, and production of important commodities like rice
and tea significantly decreased. Chinese investments have caused agricultural lands to be
diverted, shrub jungles to be cleared, and elephant migration routes to be disrupted. (Sri
Lanka’s Economic, 2022)
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Pol 101 Economic crisis of Sri Lanka 6

HOW SRI LANKA HAS BEEN DEALING WITH THE CRISIS

• The country's borrowings range anywhere from $85 billion to over $100 billion. Sri Lanka
has been attempting to reduce its debt payment. Which is supported by the G7 group of
countries (Canada, France, Germany, Italy, Japan, UK and the US). However, they must
all sallow losses.

• So far China and India have agreed to help and the IMF has discussed a possible $3bn loan.
The World Bank has agreed to lend Sri Lanka $600m, and India has offered at least $1.9bn.

• In August, UNICEF issued an appeal for 25mill to meet urgent needs for at least half of Sri
Lankas child population.

• Printing money to pay salaries was also an option being explored, but Mr. Wickremesinghe
warned this would be likely to boost inflation and lead to further price hikes.

• Wickermesinghe also suggested the state-owned Sri Lankan airlines be privatised and
asked Russia and Qatar to supply it with oil at low prices to help reduce the cost of petrol.

• In October, Sri Lanka's cabinet has approved a proposal to downgrade the island nation's
economic status from lower middle economy to "low-income country", in order to get
access to concessional funding from international organisations

• In November, Sri Lankan government decided to hike taxes to increase revenue.

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Pol 101 Economic crisis of Sri Lanka 7

LESSONS LEARNT FROM THIS CRISIS

The first lesson to be learned from Sri Lanka's ongoing economic woes is that no crisis happens
overnight. The symptoms of any crisis appear long before it occurs. Any type of disaster can
be dealt with if appropriate measures are taken as soon as the symptoms appear.

Reducing government expenditure

Government spending in excess of needs and capacity is a long-standing problem in Sri Lanka.
In order to deal with the debt burden caused by the increased spending, the country has become
bankrupt. The situation in Bangladesh has not yet reached such a level. But Bangladesh also
has several unnecessary major projects, as well as rapidly increasing government spending. So,
Bangladesh has to be careful about that.

Precautions in debt management

Sri Lanka borrowed at high-interest rates for major projects. As a result, they had this crisis. In
order to maintain the trend of economic development, along with the increase in the per capita
income of Bangladesh, the possibility of increasing the loan rate in the future must also be
considered. High loan interest should be reduced as far as possible.

Importance of Government tax collection

For the past few years, subsidies in various sectors, including expenditure on salaries and
pensions of Bangladesh government employees, have been increasing at an unusual rate. In
this situation, the government should also pay attention to tax collection.

Be careful in using Foreign Currency

A lot of money is laundered abroad. That is why the foreign exchange crisis has now occurred.
So, we have to be careful in supplying luxury items.

Increasing Organic Farming

We have to reduce imports and increase exports. So, we have to give importance to organic
farming so that we can reduce our dependence on foreign demand. However, the decision of
organic farming shouldn’t be taken without informing farmers as they need to adapt to the new
technology.
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Pol 101 Economic crisis of Sri Lanka 8

RECOMMENDATION
This issue will take Sri Lanka a long time to resolve. Sri Lanka needs comprehensive economic
reforms as follows:

• In order to maintain macroeconomic stability and public trust in the local currency, a
steady monetary policy is essential. The need for an independent central bank in Sri
Lanka is crucial.

• Central Bank committees need to make long-term policy decisions free from political
pressure if they include more well-respected specialists and give them a defined term.

• The government should establish a method to effectively collect taxes and expand the
tax base rather than just raising taxes.

• Since the appropriate government ministries pick the chairperson and board of directors
of SOEs, they frequently have political party allegiances. After a comprehensive
investigation is conducted to systematically evaluate the advantages and hazards
involved, the SOEs should be privatized.

• Sri Lanka should find specialized value additions to implement in the supply chains of
multinational corporations to improve its exports effectively.

• The labor force should be grown through education and training with an emphasis on
building future skills such as analytical thinking and creativity.

• Sri Lanka should lift its high tariffs and trade restrictions to engage in world trade more
freely with other developed countries. (Abeyratne, 2022).
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Pol 101 Economic crisis of Sri Lanka 9

CONCLUSION
After all, Sri Lanka is in an unprecedented economic crisis. However, this crisis is not limited
to the economy. People have started anti-government movements due to the shortage of food
products and energy. The main reason Sri Lanka is insolvent today is the excessive foreign
debt. The external debt doubled between 2010 and 2020. Much of this was spent on ambitious
overpriced mega projects (seaports, airports, etc.), which did not deliver as expected.
Now the economic crisis is not limited to Sri Lanka. Several emerging economies from Europe
to Asia, Africa, and South America are heading toward the same crisis. A few years ago, no
one thought that Sri Lanka would be in such a crisis. Bangladesh must also be careful not to
suffer from complacency to prevent the possible emergence of a similar situation in the future.
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Pol 101 Economic crisis of Sri Lanka 10

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