As a neighbor of India, Sri Lanka, an island nation close to Kerala, is currently facing serious crises. The country has been facing a serious economic crisis for the past few years. As the financial crisis reached its peak, the Rajapaksa government declared a state of emergency. It is safe to say that the Rajapaksa family, which has long dominated Sri Lanka’s political constituencies, has succumbed to popular anger. It is not right to place the entire responsibility for such a surrender on the Rajapaksas. The Sri Lanka People’s Front, a political party of the Rajapaksas, came to power with huge popular support in the 2019 general elections, especially against the current President Gotabhaya. As Gotabhaya’s president, he quickly gained massive popular support. Even when he came to power, this small democracy was facing many economic problems. The epidemic strikes like a thunderbolt and the problems become more complicated as we work hard to find a solution.
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Things came to a head on April 1, 2022, when Sri Lankan citizens, including women and children, gathered in front of the official residence in Colombo, the Sri Lankan capital of Gotabhaya, to demand the resignation of the President. The declaration highlighted the objectives of ensuring public safety, safeguarding public law and order, and facilitating the availability and distribution of essential services and food items in the interest of the community.
Little did we realize that the background to this sudden outbreak of unrest had been forming in Sri Lanka for some time. This led to two core developments. One, the bombing of an ancient Christian church in Colombo on Easter Sunday in 2019. Second, the advent of the Pandemic, which led to a worsening of the economic situation in 2020. These two developments, one after the other, have paralyzed the inherently weak Sri Lankan economy.
The main reason for the current crisis in the Sri Lankan government was the collapse of the tourism sector, which was the main source of revenue following Kovid’s arrival. At the same time, the crisis was exacerbated by a drop in exports and a fall in foreign exchange earnings. Such situations have been developing rapidly over the past two years. Even after the increase in foreign debt, the government failed miserably to focus on increasing domestic productivity and hence exports.
The declaration of a food emergency is the first sign of a serious crisis facing the Sri Lankan economy in August 2021. The availability and supply of foodgrains in the domestic market has come to a complete standstill. Imports had to be increased tenfold to avoid civil unrest. As a result, foreign debt has skyrocketed. It is almost certain that in 2021 there will be a failure to meet the debt burden accurately.
By then, it was clear that the rough and tumble of the Sri Lankan economy could not be concealed. Long queues for petrol, diesel, LPG cylinders, kerosene, milk and eggs would become a daily sight on various streets. Although the crowds at the supermarkets did not subside, the rapid disappearance of goods from the shelves became a daily occurrence. The leftover goods were either transformed into low quality or could be bought only by the affluent masses at high prices. The price of cooking gas, edible oil, rice, pulses, vegetables, fish and meat was rising with every passing minute. The announcement of a ‘black out’ for 13 hours following the fuel shortage provoked outrage throughout Sri Lanka. They took to the streets en masse and were forced to chant slogans against the government.
As a result, the Sri Lankan rupee depreciated by 300 against the US dollar and 400 on the black market today. Importers have fallen sharply. At the same time, with the massive job losses, incomes plummeted and ordinary people and the poor could not afford the rising cost of living.
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Needless to say, Sri Lanka’s over-reliance on Chinese financial aid has led to the current severe financial crisis. In addition to the $ 2.4 billion in aid provided by India in 2022, China provided $ 2.8 million in pandemic relief assistance and is currently considering an additional $ 2.5 billion. The Sri Lankan government has relied heavily on IMF funding for many years. Apart from all this, the Rajapaksa government was forced to rely on the loans of many other global lending agencies. Given this situation, the allegation that the main cause of the Sri Lankan crisis is a “Chinese debt trap” is unfounded. At the same time, the port of Colombo wasted no money on loans from China when it failed to repay loans taken from China for port development. This does not mean that the Sri Lankan government was handling everything well. Inflation and inflation, which were the result of careless handling of monetary policy by financial mismanagement and financial overcrowding, were never tolerable.
Statistics compiled by globally acclaimed Carmen Reinhart and Christopher Trebach show that governments in power in Sri Lanka have implemented 70 per cent comprehensive economic stability policies over the past four decades using money borrowed from the IMF. Pakistan is the only South Asian country to have used more IMF funds. While Bangladesh was 56 per cent dependent, India spent only 15 per cent. Even then it was abandoned. The Government of India has taken this wise decision since 1995 following strong opposition from the academic community and the Opposition.
The general opinion of financial thinkers is that economic instability actually reflects a serious social and political situation. Among them is Modi’s economic adviser, Dr. Arvind Subramanian specifically mentions the unrest caused by inflation and inflation. Among those at the forefront of this ideology were Arbert Hershmann and Milton Friedman. When it ran out of money, the central bank slammed 1.2 trillion Sri Lankan rupees without looking back and exacerbated inflation. More than 60 per cent of the loan amount was in the form of market loans and he had to pay extortionate interest. Such core economic issues and their mismanagement go to the final analysis, which is temporarily tied to racial rivalries and the strengthening of religious sectarianism. If such a situation prevails, the bombings that took place on an Easter Sunday in 2019 may be more organized and widespread than their isolated nature. The influence of terrorists, even among Tamils, can take on new forms and appearances at any moment. It would be a mistake to think that Islamist extremists would miss such opportunities.
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In short, Drs. Not only is there a recurrence of Peronism in Argentina in Sri Lanka, as Arvind Subramanian fears, but there are also concerns that the Sri Lankan military may step in to mark the end of the Rajapaksa family’s rule, as happened in Indonesia during General Suharto’s rule. Past experience teaches us that whenever civilian rule failed, there was military intervention. While macroeconomic stability is a good idea, it is already clear that in today’s critical situation, neither the Sri Lankan economy nor the government in power there can make it a reality. With the debt-to-export ratio rising to 270 per cent, it is still impractical to borrow. Some countries like India may be willing to lend to some extent at free rates. We may also be able to deliver food grains, milk, vegetables, eggs and other daily necessities for free. But this does not matter. Anything can happen tomorrow. Just wait.