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DAILY NEWS ANALYSIS

  • 11 July, 2022

  • 8 Min Read

CRISES IN SRI LANKA: EXPLAINED

CRISES IN SRI LANKA: EXPLAINED

Gotabaya Rajapaksa has agreed to step down as the President of the island nation, following a huge protest by the people.

His regime is facing crises has four interconnected dimensions: economic, governance, social, and legitimacy.

People are living through harrowing economic collapse, with accessing essentials such as fuel, food, and medicine becoming an everyday battle.

Poor Decisions By The President Rajapaksa

  • He began his tenure as President in November 2019 by promising a future of stability, security, development, and prosperity for the people of Sri Lanka.
  • He concentrated a great deal of financial and administrative power into his hand by re-establishing the Presidential Executive as the Central Institution of state power, thus Sri Lanka was brought back to executive presidential through the 20th amendment.
  • Continuous failures and confusion in policy making and implementation are the heart of an ongoing governance crisis.
  • Militarization of public administration, the decision to ban chemical and fertilizers input in all spheres of agriculture, mishandling of Sri Lanka’s chronic foreign exchange crisis and
  • Government’s failure to regulate the rising prices of essential commodities. All of these made the Sri Lankan citizens pay heavy prices for the poor decision-making of the government.

Why is Sri Lanka suffering from a crisis?

the Sri Lankan government declared officially that the country was hit by the worst economic crisis in January 2021, it is facing an unprecedented crisis due to economic mismanagement, corruption, and an agricultural crisis.

  • The policy miscalculations such as imposing tax cuts which took a heavy toll on government revenues, and cut in taxes led to budget deficits soaring from 55 in 2020 to 15% in 2022. Even the bad monetary policies led to an increase in inflation (17.5% in 2022) which has triggered unrest and protest among the citizens.
  • Due to the Balance of Payment crisis, Sri Lanka is not able to import goods like paper sugar medicines petrol, and even food.
  • the economic crisis is accompanied by a severe food shortage, the increase in food prices was caused by a depreciation in the currency which forced the government to impose an economic emergency and gave the authority the following powers:

1: right to seize food stock designated as a staple food

2: help set the price of staple food

3: help in rationing food

Factors that triggered an economic crisis

  • Covid 19 pandemic put the tourism industry on hold which led to a dip in the forex reserve ($7.5 billion in 2019 to $2.8 billion in 2021) as the tourism industry accounted for 10% of Sri Lanka’s GDP.
  • A depreciated currency, high dependence on imports, and hoarding led to a steep rise in food prices in Sri Lanka.
  • Russia Ukrainian conflict also is a factor that is affecting the already precarious economic condition of Sri Lanka tourism relies on tourists from Russia and Ukraine.
  • Russia is also the second biggest market to Sri Lanka when it comes to tea exports.
  • Due to the move toward 100% organic farming the farming industry collapsed which was based on the tea industry, even organic farming is expensive and the yield is far less in comparison.
  • In November 2021 Sri Lanka was forced to abandon its policy to become the world’s first organic nation, leading to continuous food prices rise.

How have these crises affected Indo-Sri Lankan relations?

The current crisis has given a new dimension to the Indian- Sri Lanka relationship.

  • Sri Lanka has taken both China and India’s help in this crisis but India has proven more reliable than China.
  • India has taken the advantage of this opportunity to improve its economic presence in the country which is a counterbalance to the increasing Chinese presence in the Indian ocean.
  • The crisis has allowed India to enhance its geopolitical interest by increasing its presence in strategically important places in Sri Lanka.
  • The relief extended by India from the beginning of 2022 totals over USD 1.4 billion - a USD400 currency swap, a USD500 loan deferment, and a USD 500 line of credit to fuel imports.

Way forward

  • There is a need for ambitious fiscal consolidation based on high-quality revenue measuring, raising income tax and VAT rates, and minimizing exemptions.
  • Government should also join hands with the Tamil political leadership to create a roadmap for the economic development of the war-affected northern and eastern provinces

Source: The Hindu


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