Sri Lanka Crisis: Explained In Simple Points

This is the story of Sri Lanka Crisis – The biggest Financial Crisis!
Because they have Borrowed much more than what they earn. Today, Sri Lanka does not have money to even buy essentials.

  • Sri Lanka reserves drop to $1.93 bn in March, $8.6 bn due in payments this year. (Source: Hindustan times)

Now let us understand this problem, And let us see How India is helping our southern neighbor?

The economy of Sri Lanka

Let us understand about Sri Lanka’s economy first:

The Sri Lankan economy is primarily dependent on 2 things: Tourism & AGRI Exports (Which include garments, rubber, tea, and coconuts). After Sri Lanka got its Independence in 1948, The world looked at the newly independent state with optimism – reason: Geographic Location.

  • Mumbai, Dubai, and Shangai – These cities were Developed because they were important for trade. More trade meant more money.

Sri Lanka is strategically important in the Indian Ocean, It could connect west to east using trade. But Sri Lanka doesn’t have money to develop ports.

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Sri Lanka: Problem with Foreign Investment

So, why didn’t the rich countries invest in Sri Lanka?

1983: Start of a Civil War – ” Sri Lanka not getting foreign investments as fast as expected: Finance Minister ” (Source: economynext)

  • Foreign investors consider Sri Lanka to be an unstable state.
  • Government spending on security increased from 4% to 20%: Money that could have been spent on development was instead spent on national security.
  • The Sri Lankan civil war ended in the year 2009, but it was too late by then – It has already missed the development bus by then.

Even then with high hopes: Sri Lanka wanted to work on Hambantota Port

  • And it took this project for funding to the US, Analysts In the USA found the project to be unviable.
  • When Sri Lanka asked India to invest as well, India did not take up the investment opportunity.
  • Indian Advisers advised against building the port: The Project will not be sustainable.

Sri Lanka: Chinese Debt Trap

Sri Lanka then finally went to China – And it took a loan from China to complete the port.

  • As projected by everyone, the project commercially failed.
  • China knew about this as well.
China’s Strategy is Mind Blowing
1. China invests its money in developing countries.
2. Chinese companies construct those projects.
3. Chinese banks lend money for the projects.
4. And when there is pressure on the economy, China watches those projects fail.
5. Then China buys those projects at a discounted rate.
6. China earns Interest, Profit, and it strengthens its international position as well.

China has funded 70% of Sri Lanka’s development projects.

  • China’s infrastructure projects have worsened Sri Lanka’s economic woes (Source: Deccan Herald)

Hambantota Port

Hambantota Port which could have made South Sri Lanka a trade hub – did not live up to its potential, and was a flunking token of political corruption.

  • And with no choice left, they leased the port to China for 99 years.

Because of all these factors – The Sri Lankan Economy was already on shaky grounds.

  • Most of the development was because of loans or debt.
  • There was no Firm plan to repay these loans.
  • And The Economy majorly ran on tourism.
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Impact of Covid on the economy

  • Covid-19 completely halted international travel. Industries dependent on tourism stopped operating.
  • Just before the Covid in December 2019 – The Rajapaksha Govt reduced the VAT from 15% to 8%.
    • The intention was to get people to spend more.
    • But to spend, you need to have money as well, right?
  • Lower Taxes slashed the Government revenue too.
  • Of the tourist visiting Sri Lanka, 13% are from India.
  • And 16% of the total tourists are from Russia.
    • The drop in tourists because of the Russia Ukraine war, will not recover for the coming times at least.
  • Tourism and Exports bought foreign revenues to Sri Lanka (Due to the Impact of Covid and war Today, net exports are -$10 Billion)

As a result,

Sri Lanka did not have forex reserves to buy essentials items (like sugar, rice, wheat, petrol)

What can India learn from this Crisis?

  • Sri Lanka could not be self-sufficient!
  • It was importing even the most basic stuff.
  • The farmers did not diversify.
  • After the Ukraine Crisis: The supply of wheat and sunflower stopped!
  • To Be Updated

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