Reason for Sri Lanka Economic Crisis: Explained in 5 points

New Delhi, Mar 21: Sri Lanka is currently reeling under a severe foreign exchange crisis with falling reserves and the government is unable to foot the bill for essential imports. The Island country is on the verge of bankruptcy.

Sri Lankan government declared an economic emergency in 2021 in view of rising food prices, a depreciating currency, and rapidly depleting forex reserves. The situation reached to an extent where President Gotabaya Rajapaksa called in the army to manage the crisis by rationing the supply of various essential goods.

According to the World Bank estimates, 5 lakh people in Sri Lanka have fallen below the poverty line since the pandemic struck, which it described as a "huge setback equivalent to five years' worth of progress".

Factors that Led to Economic Crisis: Explained in 5 Points

The tourism industry, which accounts for 10 per cent of the country's GDP, is hit hard by the pandemic. Several countries including Canada recently warned its citizens over travelling to the Island country due to foreign exchange crisis and this is not going to help the industry. The UK, India and Russia are three major sources of inbound tourism for the Island country.

The government's decision to ban chemical fertilizers to make agriculture 100 per cent organic had a negative impact on the economy. Agricultural production is being hit by the new law as organic farming reduces production by half, as per the experts. The price rice of essentials including rice and sugar allegedly due to hoarding of essentials by "food mafia" added to the woes.

A major problem that the country is facing is a huge foreign debt burden as it owes over $5 billion in debt to China alone. It is paying an additional $1 billion loan to Beijing that it took in 2021. It also owes big money to India and Japan. As of November, foreign currency reserves available with the country were just $1.58 billion, down from $7.5 billion when Rajapaksa became the president in 2019.

With forex reserves dropping from over $7.5 billion in 2019 to around $2.8 billion in July 2021, the supply of foreign exchange was hit while increasing the amount of money that Sri Lankans have had to shell out to purchase the foreign exchange necessary to import goods. As a result, the value of the Sri Lankan rupee depreciated.

Sri Lanka's high dependence on imports for its essential items such as sugar, pulses, cereals and pharmaceuticals has only added to the troubles as the country is facing a shortage of foreign currency to pay the import bills.