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Explained: Five reasons behind Sri Lanka's ongoing economic crisis

Explained: Five reasons behind Sri Lanka's ongoing economic crisis

Explained: Five reasons behind Sri Lanka's ongoing economic crisis
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By CNBCTV18.com Apr 5, 2022 11:15 PM IST (Updated)

Sri Lanka economic crisis: The South Asian republic has become a classic example of a twin deficits economy, with national expenditure exceeding national income and imports greater than exports.

Debt in billions due to years of accumulated borrowings, record inflation, lack of foreign currency, crucial sectors witnessing a sharp fall in demand thanks to the pandemic, and the alleged government mismanagement are among the reasons that have dragged Sri Lanka into not just an unprecedented economic crisis but also a massive political turmoil.

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The South Asian republic has become a classic example of a twin deficits economy, with national expenditure exceeding national income and imports greater than exports. It’s clear that the country may not be able to put itself together unless it receives help. It has sought loans from the Asian Development Bank, India and China to survive the crisis.
Meanwhile, the ruling coalition lost majority in the Parliament, as reported by news agency Reuters. The opposition rejected an offer by President Gotabaya Rajapaksa who had called to form a ‘unity government’ on Monday following the resignation of 26 ministers of Prime Minister Mahinda Rajapaksa's Cabinet amid violent protests. People are on roads protesting against their government amid a severe shortage of fuel, essentials and power outages.
The president on Monday had refused to step down but said was ready to hand over the government to the party that proves to hold 113 seats in Parliament.
Even as the country’s economic-political crisis continues to escalate, here’s taking a look at some of the crucial factors that played the recipe of this disaster:
Shortage of foreign reserves
The alleged economic mismanagement of successive governments has depleted 70 percent of Sri Lanka’s foreign reserves with only $2.31 billion left with debt repayment of over $4 billion. Sri Lanka’s high dependency on imports for essential items like sugar, pulses, and cereals adds fuel to the economic meltdown as the island nation lacks foreign reserves to pay for its import bills. Rajapaksa recently said that Sri Lanka could face a trade deficit of $10 billion this year.
The pandemic effect
The island nation's huge dependence on tourism and foreign remittances was sapped by the COVID-19 pandemic that set the pretext for the current crisis. Tourism, which accounts for over 10 percent of the Sri Lankan GDP, was hurt after it lost visitors from three key countries: India, Russia and the UK.
Russia-Ukraine war-induced inflation
The ongoing Russia-Ukraine war resulted in steep price inflation of crude oil, sunflower oil and wheat. Crude oil prices hit a record high in 14 years with prices soaring over $125/barrel at the height of the crisis. India had to step in by supplying 40,000 MT of diesel under a promised $500 million line of credit. India has so far supplied over 2,00,000 MT of fuel in the last 50 days.
Agri sector crisis
The Rajapaksa government's decision to ban all chemical fertilizers last year to make agriculture 100 percent organic severely hit the country's farm production, especially in rice and sugar production forcing the reversal of this decision.
Sharp fall in FDI
The FDI in the country has drastically decreased under the rule of the incumbent President Gotabaya Rajapaksa. According to government data, FDI stood at $548 million in 2020 compared to $793 million and $1.6 billion in 2019 and 2018, respectively.
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