Economic Crisis in Sri Lanka – UPSC GS2

Status of Economic Crisis in Sri Lanka:
  • Consumer Price Inflation (CPI) is at 16.8%
  • Sri Lankan Rupee has fallen.
  • The price of cooking gas spiked and the price of the milk powder shot up.
  • Authorities were forced to cancel school examinations for millions of students, due to a shortage of paper.
  • Sri Lanka must repay foreign debt totalling nearly $7 billion this year (2022) and continue importing essentials from its dwindling dollar account.
Reasons for the recent economic crisis in Sri Lanka:
  • Easter killings of 2019:  It dealt a hammer blow to the country’s tourism industry, its main economic activity and source of revenue.
  • Dwindling foreign exchange earnings: It has led to restriction on imports, which in turn has led to shortages of food essentials.
  • High Retail inflation: It has led to skyrocketing of food prices.
  • An overnight switch to organic farming by government: It has threatened Sri Lanka’s main export, the paddy and tea.
  • High External debt. In 2022, the country reportedly had to pay some $4.5 bn to service its sovereign bonds. Nearly half of Sri Lanka’s external debt is owed to international capital markets, and slightly below a quarter to international banks.
  • Lack of support from IMF: Sri Lanka has exited the IMF programme in 2019 because of the tough conditions, and is reluctant to approach the Fund again.
Assistance to Sri Lanka: 
  • India: 
    • India has extended assistance totalling $ 2.4 billion including:
      • a $400 million RBI currency swap,
      • a $500 million loan deferment,
      • credit lines for importing food, fuel, and medicines.
    • Recently, a billion-dollar credit line was finalized.
  • China:
    • China is considering Sri Lanka’s recent request for further $2.5 billion assistance.
    • Beijing has extended $2.8 billion since the outbreak of the pandemic.
How is India’s assistance being viewed in Sri Lanka?
  • Sri Lanka has thanked India for the timely assistance, but there is growing scepticism in Sri Lankan media over Indian assistance.
  • Indian assistance is “being tied” to  Indian key infrastructure projects in the island nation in the recent past.
  • India is blamed for resorting to “diplomatic blackmail”, while Sri Lankan leaders are criticized for trading crucial energy projects for emergency financial assistance from India.