Why is Sri Lanka suffering from a crisis?
Background: When Sri Lanka escaped from the 26-year civil war in 2009, its post-war GDP growth rate was very strong at 8.9% per year until 2012.
However, global commodity prices have fallen, exports have slowed, and imports have increased, halving the average GDP growth rate since 2013.
Sri Lanka’s wartime budget deficit was large, and the global financial crisis of 2008 depleted foreign exchange reserves. The conditions got worse. Economic health of Sri Lanka.
Recent Economic Shocks: The Easter bomb blasts of April 2019 in churches in Colombo resulting in 253 casualties, consequently, dropped the number of tourists sharply leading to a decline in foreign exchange reserves.
The newly led government by Gotabaya Rajapaksa in 2019 promised lower tax rates and wide ranging SoPs for farmers during their campaign.
The quick implementation of these ill advised promises further exacerbated the problem.
The Covid19 pandemic in 2020 made the bad situation worse
Exports of tea, rubber, spices and garments suffered.
Tourism arrivals and revenues fell further
Due to a rise in government expenditures, the fiscal deficit exceeded 10% in 2020-21, and the debt to GDP ratio rose from 94% in 2019 to 119% in 2021.
Sri Lanka Fertilizer Ban: In 2021, all fertilizer imports were completely banned and Sri Lanka was declared to be a 100% organic farming country overnight.
This overnight switch to organic fertilizer had a major impact on food production.
As a result, President Sri Lanka has declared an economic emergency to stop rising food prices, currency depreciation and the rapid depletion of foreign exchange reserves.
The lack of foreign exchange, coupled with a disastrous overnight ban on fertilizers and pesticides, has caused food prices to skyrocket. Inflation is currently above 15% and is projected to average 17.5%, with millions of poor Sri Lankans on the verge of collapse.