The South Asian island nation of Sri Lanka has been facing an economic crisis for several years. However, since the beginning of this year, the crisis has intensified. The prices of all the daily necessities are skyrocketing. Lack of fuel di. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .srupts power generation. How the country will survive in this situation is now speculation. However, the United Nations has advised the country to exchange dollars with neighboring countries to accept dollars and ensure temporary basic income for its citizens.
Debt-ridden Sri Lanka finally declared itself ‘financially bankrupt’. Since then, there have been calls for the resignation of President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa. According to the latest reports, Mahinda Rajapaksa resigned and took refuge in a naval base to escape the wrath of the people.
In 2019, a working paper of the Asian Development Bank (ADB) stated, ‘Sri Lanka is a classic twin deficit economy’. The twin deficit means that a country’s national expenditure exceeds its national income and the country’s commercial production of goods and services is inadequate.
Analysts say the main reason for the failure of defaulting Sri Lanka is the indiscriminate sale of state bonds to foreign investors on a commercial basis. In other words, the Sri Lankan government has sold savings certificates in dollars without considering the past.
These dollar-based savings certificates account for about half of the country’s total foreign debt. The Sri Lankan government has failed to pay the installment-based profits of these savings certificates due to the depreciation of the dollar in the state reserves.
The Sri Lankan government is now reaching out to the IMF for dollars to cover emergency import costs. If the situation improves, the interest on savings certificates will be repaid to foreign investors later. This means that Sri Lanka is primarily rescheduling loans taken through savings certificates sold in foreign currency. This is about 50 percent of Sri Lanka’s total foreign debt.
Sri Lanka’s economy revolves around three sectors — readymade garments, tourism and tea. They have not been able to diversify the economy. And during Covid’s time, countries that relied heavily on tourism suffered the most. The same thing happened in Sri Lanka. In the last two years, they have not been able to generate much revenue from the tourism sector. But they earn 500 to 600 million a year from tourism.
