Eco Project

The Economic Crisis In Sri Lanka
Origins and The Effects

Introduction
Sri Lanka is currently grappling with an economic crisis marked by high inflation, an expanding trade
deficit, and a growing debt burden. The country's economic growth has been sluggish, and the
government has struggled to manage its finances. This Project aims to examine the underlying causes of
the crisis, such as mishandling of public funds, insufficient economic diversity, and political instability.
Additionally, it will explore the societal and economic consequences of the crisis, including how it has
impacted poverty and inequality levels. Finally, the paper will suggest potential solutions to the crisis, such
as implementing sustainable economic policies and cultivating growth in the private sector.
Few More Factors:
Another factor contributing to the crisis is the limited economic diversity in Sri
Lanka. The country's economy relies heavily on a few key sectors, such as
tourism, tea exports, and garment production. This narrow economic
foundation makes the country susceptible to external shocks, like the
COVID-19 pandemic, which has heavily impacted the tourism industry.
Additionally, political instability has played a role in the economic downturn.

Sri Lanka has experienced political turmoil in recent years, including a
constitutional crisis in 2018 and a change in government in 2019. This
instability has created uncertainty for investors and led to a decline in
business confidence
Causes of the Crisis:
The mismanagement of public funds is one of the primary reasons for Sri
Lanka's current economic crisis. The government has borrowed heavily to
finance infrastructure projects and social welfare programs, resulting in a
mounting debt burden. In the past few years, the country's debt-to-GDP ratio
has surged from 72% to 117%
How this crisis affected the world's economy?
The economic crisis in Sri Lanka had limited direct impact on the world economy, as Sri
Lanka is a relatively small country with a small share of global economic activity.
However, the crisis did have some indirect effects on the global economy.
One way in which the crisis affected the world economy was through its impact on
global financial markets. The downgrade of Sri Lanka's credit rating by Moody's in 2021,
for example, may have led some investors to re-evaluate their holdings of Sri Lankan
assets, potentially leading to a sell-off of Sri Lankan bonds and other securities. This in
turn could have contributed to increased volatility in global financial markets and put
pressure on other emerging market economies that are more closely integrated with
global financial markets.
Few more ways the crisis affected the world's economy.
A way in which the crisis may have affected the world economy is through its impact on Sri Lanka's
trade relationships. Sri Lanka is an important exporter of apparel, tea, and other goods to many
countries, including the United States, the European Union, and Japan. If the economic crisis in Sri
Lanka led to a decline in the country's export competitiveness or a disruption in its supply chains,
this could have reduced the availability of these goods in other countries and contributed to higher
prices and inflationary pressures.
Finally, the crisis may have had broader implications for global economic governance and
international financial institutions. The IMF, for example, provided a loan to Sri Lanka in 2020 to
support its economic reform efforts and address its balance of payments difficulties. If other
countries in the region or elsewhere in the world also experience economic crises, this could put
pressure on the IMF and other international financial institutions to provide additional financial
support, potentially straining their resources and raising questions about their effectiveness in
addressing global economic challenges.
Consequences of the Crisis:
The economic crisis in Sri Lanka has led to significant societal and economic
consequences. One of the most noticeable is the effect on poverty levels. The crisis has
reduced the standard of living for many Sri Lankans, especially those residing in rural
areas.
Furthermore, the crisis has heightened inequality as it has disproportionately affected the
poor. Meanwhile, the wealthy have been able to weather the storm more comfortably. This
has exacerbated existing societal and economic inequalities within the country.
Moreover, the crisis has negatively affected the country's international standing. Sri
Lanka's credit rating has been downgraded by major rating agencies, making it harder and
more costly for the government to borrow money. This has further strained the country's
finances and hindered its ability to invest in critical infrastructure and development
projects.
A Few Solutions to resolve the problems:
Solution-1
To address the economic crisis in Sri Lanka, the government
must implement sustainable economic policies that promote
growth and lessen the debt burden. This requires fiscal
discipline, including reducing government expenses and
improving revenue collection.
Solution-2
Promoting economic diversity will also be
important to lessen the country's reliance on only
a few key sectors. This could entail investing in
new industries, such as technology and
renewable energy, and improving the business
environment to encourage growth in the private
sector.
Solution-3
Political stability is critical to restore investor
confidence and promote economic growth.
Achieving this goal will necessitate a commitment
to democratic governance and the rule of law, as
well as a focus on creating robust institutions
capable of withstanding political turmoil.
Graphs representing the economic downfall of Sri Lanka
A reason for the downfall is the widening trade gap(Gap between the imports and
exports). Here is a graph that represents the widening trade gap of Sri Lanka.
A few more graphs showing the downfall of Sri Lanka
Another reason for the downfall is high inflation rates in Sri Lanka Here is a graph
showing the inflation rates of Sri Lanka over the years.
Another reason for this downfall was the decrease in Foreign Reserves
Here is a graph showing how much the foreign reserve of Sri Lanka has
decreased.
Conclusion:
The economic crisis in Sri Lanka is a multifaceted issue that

requires a multi-pronged approach to address. By implementing
sound economic policies, cultivating economic diversity, and
ensuring political stability, the country can recover from the crisis
and establish a more prosperous future for its citizens. However,
achieving these goals will necessitate political will and cooperation
among government officials, business leaders, and civil society
organizations.
Bibliography
1. Asian Development Bank. (2021). Sri Lanka: Economic Outlook. Retrieved from
https://www.adb.org/countries/sri-lanka/economy
2. Central Bank of Sri Lanka. (2021). Annual Report 2020. Retrieved from
https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/annual_report/2020/english/ar2020
e.pdf
3. Colombo Gazette. (2021). Sri Lanka’s credit rating downgraded by Moody’s. Retrieved from
https://colombogazette.com/2021/03/31/sri-lankas-credit-rating-downgraded-by-moodys/
4. International Monetary Fund. (2020). Sri Lanka: Request for Extended Arrangement Under the Extended Fund
Facility-Press Release; Staff Report; and Statement by the Executive Director for Sri Lanka. Retrieved from
https://www.imf.org/en/Publications/CR/Issues/2020/06/03/Sri-Lanka-Request-for-Extended-Arrangement-Und
er-the-Extended-Fund-Facility-Press-Release-49456
5. Karunanayake, A. (2021). Sri Lanka: Post-Covid Economic Recovery. Retrieved from
https://www.economywatch.com/features/Sri-Lanka-Post-Covid-Economic-Recovery.1154.html
6. World Bank. (2021). Sri Lanka. Retrieved from https://data.worldbank.org/country/sri-lanka
7. "Moody's downgrades Sri Lanka's sovereign credit rating," Reuters, March 31, 2021:
https://www.reuters.com/article/sri-lanka-ratings/update-1-moodys-downgrades-sri-lankas-sove
reign-credit-rating-idUSL4N2M920T
8. Graphs-https://theconversation.com/how-did-sri-lanka-run-out-of-money-5-graphs-that-explain
-its-economic-crisis-187352
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The Economic Crisis In Sri Lanka

Origins and The Effects

Additionally, political instability has played a role in the economic downturn.

The economic crisis in Sri Lanka is a multifaceted issue that

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