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Lessons From Sri Lanka’s Economic Crisis


The dual deficits – budget shortfalls and current account deficits – led to Sri Lanka’s economic crisis. Agricultural productivity has fallen, especially for tea, which is the lifeblood of the country. Sri Lanka produces 300 million kg of tea annually, exports 97% of that and accounts for 50% of the total global mainstream tea trade. Meanwhile, the tourism sector has been badly damaged by the covid-19 pandemic. The war in Ukraine has increased the cost of importing oil and has resulted in a further decline in tourism revenue; 30% of tourists this year are from Russia, Ukraine, Poland and Belarus. Critics also blame tax reform for the drop in revenue.

Is government policy at fault?

Sri Lanka’s push towards organic farming may have led to a reduction in farm productivity; However, in the long run, it is a step in the right direction to preserve soil fertility. As demonstrated by Laffer’s Curve, tax reform should have resulted in a massive payoff, except for the faulty implementation. International trade relations are a two-way traffic – one cannot expect an increase in exports by simply reducing export taxes while imposing a ban on mass imports. (Import restrictions on 369 items were lifted on June 1.) Being stuck in China’s infrastructure loans is a major policy error.

What is the way out?

India has extended nearly $3.5 billion through lines of credit for food, medicine, fuel and other necessities, while also deferring loans, etc. However, in the end, Sri Lanka had to rely on the IMF package to manage its Balance of Payments crisis. Clearly, the IMF can insist on sound economic reforms as it did in 1991 for India. Ultimately, however, it will facilitate economic recovery.

What is the state of its economy now?

Sri Lanka is grappling with shortages of medicine, gasoline, cooking gas, necessities and other necessities, and its worst political, financial and economic crisis. With the January-March 2022 cumulative trade deficit at $2.4 billion, the balance of payments crunch and usable foreign exchange reserve positions fall below $50 million. dollars in the first week of May, the country was forced to suspend payments on foreign loans, of which about $7 billion is due this year.

Is there a lesson for India?

Economically, nothing compares. However, India should work towards self-reliance, especially in the production of essential commodities such as oilseeds, fertilizers and renewable energy, imports can deplete foreign exchange reserves. India also needs to seriously think about organic agriculture from a long-term perspective. India has also taken the right step not to fall into the Chinese trap.

Jagadish Shettigar and Pooja Misra are instructors of BIMTECH

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