Sri Lankan Crisis: Perils of Flawed Economic Policies and Mismanagement

Sri Lankan’s human development and socioeconomic indicators have always been ahead of its South Asian neighbors. Initially Sri Lanka was leading in South Asian region on Human Development Index, Health Index and Food security Index. But the faulty macroeconomics and foreign policies altogether with an autocratic rule added insult to an injury. This political instability along with an inflation and inherited fallacies of economic wasn’t sudden. Its rise can be seen from the Global Financial Crisis (2008) and Civil War (2009-2015). This unwanted economic perils were accentuated by Easter Bomb blasts of 2019. The current crisis, thus is an interplay of the inherited problems and the economic mismanagement by successive governments in Sri Lanka, a fallout of the Civil War which was heightened by the Easter bombings of 2019, the Covid-19 pandemic and flawed economic policies.

In the aftermath of, firstly, Global Financial Crisis and then Civil War, there has been an upsurge in the instability of economic, decreased in Foreign Exchange Reserves and over dependency on the International Monetary Fund (IMF) and neighboring country for monetary support. To counter their economic instability, Sri Lankan government has taken US$ 2.5 billion from IMF in 2009 and US$ 1.5 billion in 2016. This cycle of taking loan to survive and to pay their debt have made them to be in a “Debt Spiral” for an indefinite period. Instead of making a calculative approach, they moved on to make an absurd type of decisions. For securing the considerable amount in Foreign Exchange Reserves, They banned the import of fertilizer to neutralize the outsourcing of For-EX Reserves and declared it as 100 percent organic farming nation. This sudden transformation from fertilizer based agriculture to fully organic farming had caused distressed among the peasants.

Along with above situation, the Impractical development projects have rubbed salt on the burn. After going through a thorough research, it has been fount that the China’s debt trap diplomacy by giving more than sufficient amount of loan just for Hambantota port and providing soft loans via another mode have formed a major reason behind the depreciation of country’s stability. There has been a drastic fall in country’s lucrative Tourism industry, which itself forms about 10% of Sri Lankan GDP and the decline in foreign worker’s remittances, which forms about 8% of the GDP, had raised the alarm for Sri Lankan PM. Both of these have been a big source for Foreign Exchange Reserve.

Then Sri Lanka’s have come up with the faulty approach to combat the crisis. Spending on unproductive projects like Mattala Rajpaksha International Airport (world’s emptiest International Airport) & Lotus Tower shows the lacking of right ideology among the government itself. This can be better described as “Twin Deficits economy” by Asian development Bank i.e. shortfall in budget, as abiding by the norms of IMF, and current account deficit.
Ongoing Crisis is an outcome of several intermingling factors ranging from heedless economic policies, global market disruptions and domestic security issues. Country has been trapped in a vicious debt cycle wherein to avail IMF’s assistance, it has to fulfil certain conditionalities. Hence, what follows is a never ending “Debt-Spiral”.