Sri Lanka's Economy was always on Fire

Sri Lanka's Economy was always on Fire

With an economy that goes down crashing within a matter of days, and a sudden burden of the debt that they had so far been oblivious to, it is correct to say that discussing Sri Lanka’s Deteriorating Economy is essential.

 Sri Lanka is currently undergoing a dual crisis i.e debt and foreign exchange crisis. This led to an acute shortage of many basic commodities. While COVID may seem to be the Primary culprit, the truth is it only sped up the process. The economy was already crumbling. Yes, the international travel restrictions due to COVID have negatively impacted the tourism-based economy, and the reduced export of tea and spices has led to severe economic crunch. However, I would like to focus on the 3 main reasons that have severely caused an impact on Sri Lanka’s Economy. 

The First Reason is the Crippling Foreign Debt that has amounted over the past decade. For eg- China has lent $5 billion for massive infrastructure projects. But these projects yielded almost no returns.

Secondly, the whimsical agricultural reforms have caused a fall of 30% in agriculture production rate. Consequently, unable to sustain its population, there has been increased dependence on imports to sustain its population. weakening its currency against the dollar and lowering its foreign reserves.

Finally, the third reason is the most condemned action i.e the undisciplined tax regime. Despite the instructions of the IMF, the President went out of his way to contradict the suggestion and reduce taxes to promote party and political agenda. The steep drop in the number of taxpayers forced Sri Lanka to take yet another loan from IMF, despite already owing it $2.6 billion. 

This crisis impacts India deeper than the surface and it is important that we ponder about its relevance in the Indian Context. 

Firstly, as a neighboring country, it is of utmost concern that the economy of Sri Lanka has plunged, especially after Pakistan's economy has already failed. For the same reason India might have to tackle a refugee crisis as many present in North Sri Lanka will look to flee to Tamil Nadu. Secondly, India is, too, owed a lot of foreign debt. Lastly, It is important to contrast and deliberate on India’s economy and if its heading towards the same spiral.

It is important that India takes away lessons for its own economy as well to ensure that we soon don’t find ourselves in the same position.

Firstly, it is important that the structural problems in the economy of the nations are recognized. A Major takeaway is that no country can sustain its population or develop Human resources by completely moving away from its primary sector like agriculture in case of Sri Lanka.

Secondly, countries are at a loss if they solely and majorly depend on sectors that are  heavily based on foreign income like tourism.  

The Second Lesson for India is to not get overflown with the ultra rightist agenda of winning elections and implement populist policies just for the sake of winning elections. In India a majority of our population are still swayed by immoral factors like freebies, distribution of money and liquor etc. While in the short term,  people might be happy, this is not sustainable in the long term and will lead to the downfall of the economy.

We should also keep in mind and ensure that massive infrastructure investment projects are accurately assessed and the estimate of the money to be invested is rationally and cautiously calculated. The foreign investment should also come from countries with whom India has genial foreign relations.

Lastly, Sri Lanka has taught us the importance of diversification. Excessive dependence on a few sectors and commodities has put a lot of pressure and finally negatively impacted the economy, and therefore, diversification is important for India.

From how situations have arised, there is an immediate need for a model economy that promotes sustainable consumption and self-reliant production, and is also free from the control of international banks like IMF and World Bank.

The Final take away is that the crisis was not just due to the spike of covid: it was the making for the past decade. Sri Lanka overlooked many major mistakes that have led to the downfall and crisis there today. In the end, Covid only added the fuel, but Sri Lanka’s Economy was always on Fire.