Don’t let crisis catch you off guard!

27 Jun 2022 | Business & Strategy

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Hooshang Bakht

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The Sri Lanka Economic Crisis 2022: What Went Wrong With The Country’s Economy?

Sri Lanka is currently facing an unprecedented economic crisis in 2022, with severe consequences on the nation’s financial stability. The country’s citizens are bearing the brunt of this crisis, as they struggle to cope with the escalating cost of living. In March 2022, Sri Lanka experienced a record-breaking surge in food prices, with an alarming 30 per cent increase, exacerbating the already dire economic situation. This economic crisis in Sri Lanka 2022 has resulted in severe food scarcity, leaving millions of Sri Lankan citizens in a state of uncertainty and desperation.

The economic turmoil and political unrest in Sri Lanka have further exacerbated the food scarcity crisis, with many people taking to the streets to call for the president’s resignation. The country’s dependence on tourism has only added to the economic woes, with businesses shutting down and many people losing their jobs. The prices of basic staples like rice, sugar, lentils, and milk powder have tripled, leaving many struggling to make ends meet.

Despite the government’s efforts to control the situation, the country’s food inflation rate continues to soar, hitting an all-time high of 30.2 per cent in March 2022. This means that the average price of food is 30 per cent higher than it was a year ago, putting enormous financial pressure on Sri Lankan households. Even in March of this year, the food inflation rate remained at a negative 1.4 per cent, a worrying sign of the economic crisis in Sri Lanka 2022.

The price of milk powder has risen by about 1,000 Sri Lankan rupees, or around INR 236 in just a few days, according to the Indian Express.Rice now costs around 500 Sri Lankan rupees per kilogramme.Essentials, especially those produced locally, have grown out of reach for many. Since 2019, the price of white rice, a major Sri Lankan staple, has risen by 93 per cent. Since 2019, the prices of chicken and lentils have increased by at least 55 per cent and 117 per cent, respectively.

The state-owned Ceylon Petroleum Corporation hiked the price of a litre of fuel from 137 rupees in 2021, to 254 rupees in March 2022($0.45 to $0.85; or $2.04 to $3.86 per gallon in 2021). Diesel prices also rose from 104 rupees per litre the previous year, to 176 rupees this year ($0.34 to $0.58; approximately $1.54 to $2.63 per gallon in 2021).

A 12.5kg cylinder of cooking gas for a typical home increased in price from 1,493 rupees ($4.9) in 2021 to 2,750 rupees ($9) in 2022. Cooking gas has become prohibitively expensive for many Sri Lankans, therefore many are turning to firewood and kerosene as alternatives.Multiple compounding reasons including tax cuts, money creation, a statewide programme to convert to organic or biological farming, as well as events like the Easter bombings in 2019 and the impact of the COVID-19 epidemic, have contributed to the issue.

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Understanding Sri Lanka’s economic downturn: How did the country get here?

The ongoing economic crisis in Sri Lanka 2022 is widely attributed to economic mismanagement by successive governments, which established and maintained a dual deficit – a budget deficit as well as a current account deficit. According to a working paper published by the Asian Development Bank in 2019, “Sri Lanka is a classic twin deficit economy. The country’s national expenditure exceeds its national revenue, indicating that its production of tradable products and services is insufficient.” Additionally, the massive tax cuts promised by Rajapaksa during his 2019 election campaign and implemented months before the COVID-19 pandemic worsened the current catastrophe. 

The economic crisis in Sri Lanka 2022 has been exacerbated by the pandemic, which decimated the country’s vital tourism industry and foreign workers’ contributions. As a result, credit rating agencies downgraded Sri Lanka, virtually shutting it out of international capital markets. Despite these challenges, Sri Lanka has the potential to recover from the economic crisis in 2022, but it will require concerted efforts from the government and stakeholders to address the root causes of the crisis and implement effective solutions.

As a result, Sri Lanka’s debt management programme, which relied on access to those markets, fell apart, and the country’s foreign exchange reserves plunged by about 70% in just two years.

The debt trap

Sri Lanka’s economic crisis in 2022 is further compounded by its concerning financial situation. The country has a meager USD 2 billion in foreign-currency reserves, while the debt repayment goal for 2022 stands at a staggering USD 7 billion. Adding to this pressure is the USD 1 billion in bonds that will mature in July 2022.

Sri Lanka’s external debt has been consistently increasing since 2005, reflecting its inability to sustain its financial obligations. The country’s external debt grew from USD 11.3 billion in 2005 to USD 21.7 billion in 2010, USD 43.9 billion in 2015, and USD 56.3 billion in 2020. 

The economic crisis in Sri Lanka 2022 has only worsened the already dire financial situation, putting enormous strain on the country’s economy.As of April 2021, China accounted for 10% of Sri Lanka’s loans, while India’s share was just 2%. These numbers suggest that Sri Lanka has borrowed heavily from other countries, which has contributed to its current economic crisis. With limited foreign-currency reserves, Sri Lanka is struggling to repay its debts, leading to concerns about its financial future.

Despite the government’s efforts to revive the economy, the country’s economic crisis in Sri Lanka 2022 has made it challenging to achieve financial stability. The mounting external debt, along with the repayment obligations, is putting enormous pressure on Sri Lanka’s financial system, leading to concerns about the country’s long-term sustainability.

The Currency game

Economic crisis in Sri Lanka 2022 has been exacerbated by the country’s rising external debt, which has grown at a faster pace than its GDP. The external debt-to-GDP ratio increased from 31.6 per cent in 2010 to 32.4 per cent in 2015, and by 2020, it was expected to rise to 40.4 percent. This mounting debt, coupled with high interest rates, led the central bank to raise policy rates to control inflation. However, this move had unintended consequences, as the Sri Lankan currency lost value against the dollar, forcing the central bank to draw down foreign reserves to stabilize the exchange rate.

This vicious cycle has contributed to Sri Lanka’s economic crisis in 2022, which shows no signs of abating. The Sri Lankan Rupee has lost over 50% of its value against the US dollar just this year, making it difficult for the country to import essential goods. Currently, a dollar costs almost Rs. 310 in Sri Lanka, up from Rs. 200 in January 2021.

The Central Bank of Sri Lanka’s data shows that between January 1 and March 31, 2021, the Sri Lankan Rupee lost 31.6 percent of its value against the Indian Rupee, 31.5 percent against the Euro, 31.1 percent against the pound sterling, and 28.7 percent versus the Japanese Yen. This indicates the extent of Sri Lanka’s economic crisis in 2022, as the country struggles to maintain its financial stability in the face of mounting debt and a rapidly devaluing currency.

What does Sri Lanka’s future look like? How will the dire economic crisis end?

Ever seen military troops at gas stations and petrol pumps? This seems to indicate the height of an economic crisis, and Sri Lanka, amidst the ongoing economic crisis in Sri Lanka 2022, has reached this height. People are waiting for hours in queues to fill their tanks, as the country is facing extreme fuel shortages and inflation due to the economic crisis. And this is only one of the country’s many problems resulting from the economic crisis.

 Sri Lanka is experiencing a full-fledged economic collapse due to the economic crisis in Sri Lanka 2022. The scenario has become increasingly bleak as a result of rising costs and the country’s debt dilemma caused by the economic crisis. What comes next is the question in this economic crisis in Sri Lanka 2022.

Will the dire economic crisis in Sri Lanka ever end?

To understand the current state of the Sri Lanka economy in 2022, it’s important to note that the country is facing multiple crises, including a debt dilemma, fuel shortages, and inflation. To address these issues, India has suggested a few options such as extending a fresh line of credit in rupees or increasing the current line of credit in dollars. However, Sri Lanka may have to resort to taking on another loan from China, which is not a wise move given the country’s already high foreign debt of $51 billion.Sri Lanka’s key revenue drivers include tourism, tea export, apparel, textile, and rice production. Unfortunately, the tourism sector has taken a hit due to the effects of the COVID-19 pandemic and the Easter Sunday bombing in 2019, causing foreign investor and tourist confidence in the country to plummet. Furthermore, the recent decision to go 100% organic by banning the use of chemical fertilisers across the board has resulted in a significant drop in yield for tea and other agricultural products. These factors, along with Sri Lanka’s dependency on tourism and tea exports, have led to the current economic downturn in the country.

To diversify the Sri Lanka economy in 2022, the country needs to focus on certain products and industries, such as clothes and textiles, which have a constantly changing market. However, this requires altering its investment rules to attract new investors, which is difficult given the country’s limited resources. Nevertheless, it is crucial to protect the economy from potential dangers by focusing on diversification and attracting new investors in 2022.

What are the lessons that India and other countries can learn from the Sri Lanka Crisis?

The Sri Lanka economic crisis of 2022 is not a sudden event, and this is something that both businesses and countries should understand. Sri Lanka has been facing a number of structural difficulties for a long time that were ignored. The country’s economic catastrophe can be attributed to several factors, including its flirtation with big-ticket projects that did not add enough value to the economy and the need for greater export diversification. India, too, needs to diversify its exports, which is the easiest way to achieve this is to expand the list of in-line items and strengthen the country’s manufacturing capabilities. Structural issues, particularly the size and inefficiency of the public sector, are another concern for India, similar to Sri Lanka’s economic crisis in 2022.

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Frequently asked questions

What is the economic crisis in Sri Lanka in 2022?

The economic crisis in Sri Lanka in 2022 refers to the current state of the Sri Lankan economy, which has been facing severe challenges such as high inflation, a depreciating currency, rising debt, and low foreign reserves.

What caused the economic crisis in Sri Lanka in 2022?

The economic crisis in Sri Lanka in 2022 is mainly caused by a combination of factors such as mismanagement of public finances, high levels of debt, the impact of the COVID-19 pandemic, and political instability.

How is the Sri Lankan government addressing the economic crisis?

The Sri Lankan government has taken various measures to address the economic crisis, such as seeking assistance from international organizations, implementing austerity measures, and introducing economic reforms.

How is the economic crisis affecting the people of Sri Lanka?

The economic crisis is affecting the people of Sri Lanka in many ways, including rising cost of living, unemployment, and a decrease in the standard of living.

What impact is the economic crisis having on businesses in Sri Lanka?

The economic crisis is having a significant impact on businesses in Sri Lanka, including a decrease in sales, closure of businesses, and difficulty in accessing credit.

Is the economic crisis in Sri Lanka expected to continue in 2022?

Yes, the economic crisis in Sri Lanka is expected to continue in 2022 due to the structural issues within the economy, political instability, and the ongoing impact of the COVID-19 pandemic.

What can Sri Lanka do to overcome the economic crisis?

To overcome the economic crisis, Sri Lanka needs to address the structural issues within the economy, implement economic reforms, attract foreign investment, and promote exports.

How is the international community responding to the economic crisis in Sri Lanka?

The international community is closely monitoring the situation in Sri Lanka and has offered assistance in various forms, such as providing financial aid and technical support.

How has the COVID-19 pandemic contributed to the economic crisis in Sri Lanka?

The COVID-19 pandemic has contributed to the economic crisis in Sri Lanka by disrupting global supply chains, reducing international trade, and affecting tourism, which is a significant source of revenue for the country.

What is the long-term outlook for the Sri Lankan economy?

The long-term outlook for the Sri Lankan economy depends on the country's ability to address the structural issues, implement economic reforms, and attract foreign investment. With the right measures, Sri Lanka can overcome the economic crisis and achieve sustainable economic growth.