Srilanka's Economic Crisis

See How Srilanka Economy Crashed...

The President and Prime Minster’s houses in Sri Lanka were burnt by protestors.

Reporting journalists were being robbed.

Shoot-at-sight orders were imposed due to rising unrest.

Some refugees from Sri Lanka have taken to boats to reach Indian shores in a desperate search for food and employment.

How did our neighbor, Sri Lanka, reach here?

Foreign Reserves

Every country keeps the currencies of other countries.

This is to be able to trade with them.

If Sri Lanka wished to buy something from the USA, it wouldn’t be able to pay in Sri Lankan Rupees. They would need US dollars.

Where would the US dollars come from?

From people who buy from Sri Lanka.

When the Sri Lankan economy exports a product or service to a buyer outside Sri Lanka, the buyer pays the Sri Lankan exporter in US dollars.

The exporter then goes to the Sri Lankan banks and asks for Sri Lankan Rupees in return for the US dollar it has.

This is how Sri Lanka (or any country) ensures it has enough of any foreign currency.

Without this, trade with other countries will be extremely difficult.

Sri Lankan Economy

Like India, Sri Lanka was ruled by the British. They got their independence around the same time as we did - 1948.

Sri Lanka has since relied heavily on agricultural exports to get foreign currency.

As such, the country’s economic output hasn’t been all that great since independence.

Sri Lanka was unable to create much economic value in the form of exports and services and this meant that it was always struggling - it was consuming more than it was producing.

Besides agriculture, tourism formed a significant chunk of the earnings the country made.

In April 2019, terrorists coordinated a series of bomb blasts across churches and luxury hotels in Sri Lanka killing hundreds of people.

This effectively scared away all the wealthy foreign tourists (mostly from Europe) from the country.

The newly elected president of Sri Lanka, in 2019, had come back to power after promising to cut taxes in his poll campaigns.

When he got power, he went on to slash taxes. This move alarmed several economists across the world because the Sri Lankan government already had very little money.

A tax cut can often lead to increased economic activity and growth which leads to the government earning more via taxes despite the lower tax rates.

Many argue that when taxes are cut to increase economic activity, it should be done in a gradual manner. Doing so allows the governments to monitor if the economic growth is happening as per plans.

Sri Lanka’s tax cuts proved to be too drastic - there wasn’t enough economic growth.

The economy never grew much while at the same time, the government’s funds dried up.

If the series of events weren’t unfortunate enough till this point, in 2020, the entire world was hit by a pandemic.

Sri Lanka’s economy was hard hit as were most other countries of the world.

Sri Lanka wasn’t producing much of what it needed. It had to import.

To import, it needed vast amounts of US dollars. This was something that they were anyway running short of.

With tourism gone, and very little else to earn from, Sri Lankans fell on agriculture to make a living.

Sri Lanka exports tea, spices, and rubber primarily.

In April 2021, Sri Lanka announced a ban on the import of chemical fertilizers claiming that it would be one of the world’s first countries to go fully organic.

This wasn’t actually a push towards more organic farming. In reality, the fertilizer ban was because of depleting foreign currency reserves.

Sri Lanka didn’t have enough money to import fertilizers.

Sri Lanka also banned other imports like luxury goods, vehicles, etc.

But fertilizers were probably the most important of imports - they shouldn’t have been banned.

With no fertilizers, the country’s farm output suddenly dropped.

Supplies of rice, tea, rubber, spices, and other essential foods crashed.

Leave exporting, Sri Lanka wasn’t producing enough for its own citizens.

The shortage led to a massive jump in prices of basic commodities like rice, lentils, chicken, eggs, milk, onions, etc.

Food, fuel, and even medical supplies are being rationed.

Long queues are seen outside petrol pumps and grocery stores.

Over the last few years, it has received loans from the IMF and other countries.

In the immediate future, it seems Sri Lanka will receive more loans to help it tide this economic storm.

Whatever it does, Sri Lanka needs to prop up its economy so it can produce at least as much as it imports.

Many economists believe this isn't going to be easy but there is no other path that the country can take.

This situation is a stark example of how important economic output important.