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Sri Lanka’s Aggravating Economic Crisis

Context:

Sri Lanka’s economic crisis is aggravating rapidly, putting citizens through enormous hardship. Over the weekend, at least two senior citizens died while waiting in long queues to buy fuel; the price of cooking gas spiked to LKR 4,199 (roughly ₹1,150), the price of the widely used milk powder shot up by LKR 600 a kg, and authorities were forced to cancel school examinations for millions of students, due to a shortage of paper.

Relevance:

GS II- International Relations  (India and its Neighbourhood)

Dimensions of the Article:
  1. Reason for Economic Crisis:
  2. What is happening on the ground?
  3. How is India helping?
  4. How is India’s assistance being viewed in Sri Lanka?

Reason for Economic Crisis:

  • Sri Lanka is in the grips of one of its worst economic meltdowns in history.
  • The first wave of the pandemic in 2020 offered early and sure signs of the distress —
    • Thousands of Sri Lankan labourers were left stranded in West Asian countries and returned jobless.
    • Garment factories and tea estates were forced to close as diseases spread in clusters. The tourism industry has taken a significant hit.
    • Thousands of young people in cities have lost their jobs as businesses have abruptly fired or shut down.
    • All significant foreign exchange generating industries, including exports and remittances, as well as tourism, were severely harmed as a result of the currency fall.
Policy Failure of Sri lankan Government:
  • The lack of a comprehensive strategy to respond to the crisis then, coupled with certain policy decisions last year — including the government’s abrupt switch to organic farming —widely deemed “ill-advised”, further aggravated the problem.
  • The government declared emergency regulations for the distribution of essential food items, amid wide import restrictions to save dollars which in turn led to consequent market irregularities, and reported hoarding.
  • Fears of a sovereign default rose by the end of 2021, with the country’s foreign reserves plummeting to $1.6 billion, and deadlines for repaying external loans looming.

What is happening on the ground?

  • At the macro-economic level, all indicators are worrisome.
  • The Sri Lankan rupee, that authorities floated this month, has fallen to nearly 265 against the U.S. dollar. Consumer Price inflation is at 16.8% and foreign reserves stood at $2.31 billion at the end of February.
  • Sri Lanka must repay foreign debt totalling nearly $7 billion this year and continue importing essentials from its dwindling dollar account.
  • In a recent address to the country, President said Sri Lanka will incur an import bill of $22 billion this year, resulting in a trade deficit of $10 billion.
    • For citizens, this means long waits in queues for fuel, a shortage of cooking gas, contending with prolonged power cuts in many localities and struggles to find medicines for patients.
    • In families of working people, the crisis is translating to cutting down on milk for children, eating fewer meals, or going to bed hungry.

How is India helping?

  • India supports Sri Lanka as part of its first-neighbourhood policy.
  • For the provision of essential commodities, a $1 billion credit line was inked. India’s help package includes a key component.
  • India has provided $ 2.4 billion in assistance since January 2022, including a $400 million RBI currency swap and a $500 million loan deferment.

China:

China is considering Sri Lanka’s recent request for further $2.5 billion assistance, in addition to the $2.8 billion Beijing has extended since the outbreak of the pandemic

How is India’s assistance being viewed in Sri Lanka?

  • The leadership has thanked India for the timely assistance, but there is growing scepticism in Sri Lankan media and some sections, over Indian assistance “being tied” to New Delhi inking key infrastructure projects in the island nation in the recent past — mainly
    • the strategic Trincomalee Oil Tank Farm project;
    • the National Thermal Power Corporation’s recent agreement with Ceylon Electricity Board to set up a solar power plant in Sampur, in Sri Lanka’s eastern Trincomalee district;
    • two renewable energy projects in northern Sri Lanka, with investment from India’s Adani Group.
  • New Delhi is accused of using “diplomatic blackmail” by the Sri Lankan media. The political opposition has accused the Adani Group of entering Sri Lanka through the “back door”, avoiding competitive bids and due process.

-Source: The Hindu

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September 2022
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