24 CASE STUDY ON SRI LANKA CRISIS
Yogesh Kamble, Yash Sahare, Pallavi Dawale, Ruchi Tekade, Janhvee Awate, Randhir Gawai
1 INTRODUCTION
Sri Lanka, formerly known as Ceylon and officially the Democratic Socialist Republic of Sri Lanka, is an island country in South Asia. It lies in the Indian Ocean, southwest of the Bay of Bengal, and southeast of the Arabian Sea; it is separated from the Indian subcontinent by the Gulf of Mannar and the Palk Strait.
Sri Lanka shares a maritime border with India and the Maldives. Sri Jayawardenepura Kotte is its legislative capital, and Colombo is its largest city and financial centre.
Also called the Teardrop of India, or the Granary of the East, Sri Lanka's geographic location and deep harbours have made it of great strategic importance, from the earliest days of the ancient Silk Road trade route to today's so-called maritime Silk Road.
2 SRI LANKA BEFORE CRISIS
Sri Lanka was ahead of many Asian nations and had economic and social independence comparable to Japan when it gained independence from the British in 1948. This comparison was possible till Sri Lanka had an independent micro economic policies.
It was flexible to foreign exchange fluctuations.
In 1970s there was armed revolt against the socialist government of Sirimao Bandernaike, who was Pro Socialist Union.
In 1977 a right Wing Pro US government came into power and began to shift away from socialist economy.
Sri Lanka was the first South Asian country to undertake liberalization in 1970s. It was very earlier as compared to China in 1980s and India in 1991.
In 2009, The Sri Lankan Civil War ended, which was started in 1982. As a result, the government regained control of the north and eastern parts of the country. The end of the war brought a hope for economic growth.
3 ANALYSIS OF CRISIS
3.1. Tax cuts and money creation The Government of Sri Lanka under president Gotabaya Rajapaksa made large tax cuts that affected government revenue and fiscal policies, causing budget deficits to soar.These cuts included increased tax- free thresholds that resulted in a 33.5%
decline in registered taxpayers, reducing VAT to 8%, reducing corporate tax from 28% to 24%, the abolishment of the Pay As You Earn (PAYE) tax and the 2%
“nation-building tax” which financed infrastructure development. The massive loss of tax revenue resulted in rating agencies downgrading the sovereign credit rating making it harder to take more debt.
In 2021 P. B. Jayasundera stated that President Rajapaksa was aware of the loss of revenue but considered it an
"investment" and had no plans of increasing taxes for another 5 years.
To cover government spending, the Central Bank began printing money in record amounts ignoring advice from the International Monetary Fund (IMF) to stop printing money and instead hike interest rates and raise taxes while cutting spending. The IMF warned that continuing to print money would lead to an economic implosion. The tax cuts were also opposed by the former Finance Minister Mangala Samaraweera who noted that as the Sri Lankan government already had far less tax revenue relative to most countries which combined with its high debt load tax cuts would be dangerous. Samaraweera predicted that
“If these proposals are implemented like this not only will the entire country go bankrupt, but the entire country will become another Venezuela or another Greece.”
On 6 April 2022, the CBSL allegedly printed 119.08 billion rupees, making it the highest reported amount printed on a single day by the CBSL for the year 2022. The total money added to financial markets for the year 2022 increased to Rs. 432.76 billion.
25 3.2. External debt
Until mid-2000s, the Sri Lankan debt was mainly from multilateral lending agencies, after which it was reoriented under the leadership of Mahinda Rajapaksa to foreign investors and lenders. Sri Lanka issues its first international sovereign bond in 2007, with high interest rates to incentivize investors. According to commentators, the money was used to fund vanity projects rather than projects of national utility.
Sri Lanka's foreign debt increased substantially, going from US$11.3 billion in 2005 to $56.3 billion in 2020.While foreign debt was about 42% of the GDP in 2019, it rose to 119% of its GDP in 2021.
By February 2022, the country had only
$2.31 billion left in its reserves, yet faces debt repayments of around $4 billion in 2022, which also includes a $1 billion international sovereign bond (ISB) maturing in July.
In 2020, US economist Joseph Eugene Stieglitz, published a report that blamed the quantitative easing policy made by US banks after 2008, for exporting debt bubbles to developing countries including Sri Lanka. In the same year, Chatham House published a report that concluded that Sri Lanka's debt crisis was primarily "a result of domestic policy decisions and was facilitated by Western lending and monetary policy". Their research pointed that after 2008, western central banks had favored a monetary policy of quantitative easing, which created low global interest rates, and had largely facilitated Rajapaksa‟s borrowing-and- spending spree as he borrowed low interest ISBs heavily. However the winding-down of quantitative easing in the US after 2013, had later sharply increased Sri Lanka's borrowing costs, and the interests rates doubled, to approximately 10 percent for short term loans, while long-term rates had jumped from 7 to 8 percent to 11–13 percent.
Failure to defend their currency, further shrank Sri Lanka‟s foreign reserves to only $6 billion by 2016.
In 2020, S&P Global Ratings said Sri Lanka's existing funding sources did not appear sufficient to cover its debt servicing needs, estimated at just over
$4.0 billion in 2021. According to the
agency Bellwether, "To solve Sri Lanka's 'budgetary problem' in repaying debt, Treasuries auctions have to succeed.
When that is done, the 'transfer problem' of foreign exchange will be automatically solved... Instead, with failed Treasury bill auctions filled with printed money, the country is slipping deeper into debt."
To resolve the debt crisis, Bellwether noted that Sri Lanka would need a credible fiscal plan and monetary policy, increasing taxes to repay debt, and interest rates and opening of imports would allow taxes to flow back to the Treasury. While it is possible to raise rates and generate dollars to repay the foreign debt by curtailing domestic credit, it is not practical to do so on an ongoing basis for many years. If investors see foreign reserves going up after debt repayments, confidence may come back but it is an arduous affair, which may or may not work given the current ideology.
In September 2021, the government announced an economic emergency, as the situation was further aggravated by the falling national currency exchange rate, inflation rising as result of high food prices, and pandemic restrictions in tourism which further decreased the country's income. This drove Sri Lanka to the brink of bankruptcy due to foreign reserves falling to $1.9 billion as of March 2022, this being insufficient to pay the foreign debt obligations of $4 billion and an International Sovereign Bond (ISB) payment of $1 billion for the year 2022.
The national inflation rate increased to 17.5% in February 2022, according to the National Consumer Price Index.
The government repaid $500 million International Sovereign Bonds which was due in January 2022 despite growing opposition coming from economic analysts and experts who all advised the government to postpone the ISB payment in order to preserve the foreign reserves.
On 12 April 2022, Sri Lanka announced that it will be defaulting on its external debt of $51 billion.
3.3 Debt Trap
Numerous observers have described the loans made to Sri Lanka by the Exim Bank of China to build the Hambantota International Port and the Mattala Rajapaksa International Airport, which
26 turned out to be unprofitable white
elephants, as examples of debt-trap diplomacy and predatory lending, China is Sri Lanka‟s largest bilateral lender.
In 2007, the state-owned Chinese firms China Harbour Engineering Company and Sinohydro Corporation were hired to build the port for $361 million. Exim funded 85 percent of the project at an annual interest rate of 6.3 percent. After the project began losing money and Sri Lanka's debt-servicing burden increased, its government decided to lease the project to state-owned China Merchants Port on a 99-year lease for cash. The $1.12 billion lease to the Chinese company was used by Sri Lanka to address balance-of-payment issues.
Debt-trap diplomacy is considered
"a severe concern to developing countries like Sri Lanka" by the Institute for Security and Development Policy. Both the U.S. Trump and Biden administrations described the occurrence of Chinese debt-trap diplomacy, especially in the case of Sri Lanka.
Former Sri Lankan Prime Minister Mahinda Rajapaksa defended the country's relationship with China and rejected the country's debt trap image, adding that "China provided concessionary loans for many infrastructure projects [during the post- conflict development]." In regards to the Hambantota Port, he added, "The Hambantota Port is not a debt trap."
Rajapaksa dismissed the view that Sri Lanka was forced to enter a 99-year lease with a Chinese company because of a failure to pay the project's debts, stating that the project is commercially viable and is transforming Sri Lanka's overall port infrastructure.
Deborah Bräutigam has disputed the usage of the term "debt-trap diplomacy". She said that the Canadian International Development Agency financed the Canadian engineering and construction firm SNC-Lavalin's feasibility study for the port, and its study concluded in 2003 that construction of a port at Hambantota was feasible. A second feasibility report, concluded in 2006 by the Danish engineering firm Ramboll, reached a similar conclusion.
According to Bräutigam, the port in Hambantota had to secure only a
fraction of the cargo which went through Singapore to justify its existence.
Bräutigam was told by several Sri Lanka Central Bank governors that Hambantota (and Chinese finance in general) were not the major sources of the country's financial distress, and Bräutigam said that Sri Lanka did not default on any loans to China.
Colombo had originally arranged a bailout from the IMF, but decided to raise the required funds by leasing the under- performing Hambantota Port to an experienced company as the Canadian feasibility study had recommended.
Asanga Abeyagoonasekera, a Sri Lankan academic warned of a Chinese „strategic trap‟ in Sri Lanka. Strategic-trap diplomacy term was coined by Asanga Abeyagoonasekera and published initially on 16 September 2021, assessing the Chinese Debt-trap diplomacy in Sri Lanka at an interview with Voice of America.
Chatham House published a research paper in 2020 concluding that Sri Lanka's debt distress was unconnected to Chinese lending, but resulted more from "domestic policy decisions" facilitated by Western lending and monetary policy than from Chinese government policies. However while external debt owed to China was officially 10% of the total debt by April 2021, some officials said that China‟s total lending was much higher after taking into account loans to state-owned enterprises and the central bank.
Local newspapers have published cartoons of Sri Lanka pleading for cash from neighboring SAARC countries.
Indian observers have noted that the Colombo Port project with China has accelerated the country's debt crisis.
According to Chinese state media, it is the largest project by China in Sri Lanka and has a total value of $1.4 billion. The damage to the once-prosperous tourism industry from the COVID-19 pandemic has also been blamed for failing to generate enough revenue to pay the country's debts.
The Australian Lowy Institute said that Sri Lanka was "not engulfed in a Chinese debt trap", as 47% of Sri Lanka's external debt is owed to international capital markets, while 22% is held by multilateral development banks, followed
27 by Japan having 10%. Supporters of the
debt-trap theory noted that "calculating the volume of loans provided by other foreign nations and sovereign bonds/private commercial loans vis-à-vis that from China is an oft quoted argument to dismiss the theory of debt- trap diplomacy". In January 2022, President Gotabhaya Rajapaksa's office stated that it would appeal to China to reschedule its debt burden during talks with the Chinese foreign minister Wang Yi. As of March 2022, there has been no official response from China.
3.4 Fall of Foreign Remittances
The Central Bank of Sri Lanka under Cabraal attempted to maintain the Sri Lankan rupee pegged while continuing heavy money printing and strict exchange controls thus pushing down the market value of the rupee. Thus, by February 2022 while the government attempted to keep the currency pegged at Rs. 200/- to the United States dollar, the unofficial market value of the rupee exceeded 248 to the dollar. This led to foreign workers remitting money through unofficial channels causing Sri Lankan banks to run out of foreign currency and foreign remittances to crash with a 61%
reduction in official remittances in January 2022.
In turn Cabraal threatened to freeze bank accounts of those that use unofficial money transmission methods.
Then Cabraal began targeting merchandise and services exporters with exporter dollar surrender requirements forcing the residual after the utilization of export proceeds to be converted into rupees and forcefully converting dollars in forex accounts of resident Sri Lankans who earn dollar salaries ignoring concerns of this creating a similar situation to remittances.
As Banks struggled, Cabraal issued warning letters to CEOs of banks demanding strict adherence to the fixed conversion rate. Former Deputy Governor of CBSL W.A Wijeywardana criticized the policies calling it "Cabraalnomics 2.0"
noting that the dollars are disappearing from official markets while a superior dynamic black market has caused exporters and immigrants to shun the formal banking system resulting in
dismantling the power of the Central Bank as the forex regulator.
3.5 Tourism
The country's tourism sector represented over one-tenth of the GDP of Sri Lanka.
The sector was negatively affected by the 2019 Easter bombings, and the COVID-19 pandemic prevented recovery. Tourism earned Sri Lanka $4.4 billion and contributed 5.6% to GDP in 2018, but this dropped to just 0.8% in 2020. In a failed prediction in April 2021 the World Bank stated, “Despite the heavy toll of the COVID-19 pandemic on Sri Lanka's economy and the lives of its people, the economy will recover in 2021, though challenges remain."
3.6 Agricultural Crisis
Sri Lanka had been self-sufficient in rice production with imports limited to specialty rice such as Basmati. In April 2021, President Gotabaya Rajapaksa announced that Sri Lanka would only allow organic farming, banning inorganic fertilizers and agrochemicals-based fertilizers. The drop in tea production resulting from the fertilizer ban alone resulted in economic losses of around
$425 million and created a 20% drop in rice production within the first six months alone reversing previously achieved self- sufficiency in rice production and forcing the country to import rice for $450 million. The situation in the tea industry was described as critical, with farming under the organic program being described as ten times more expensive and producing half of the yield by the farmers.
The program was welcomed by its advisor Vandana Shiva, but it ignored criticism from the scientific and farming communities who warned about the possible collapse of farming, including a financial crisis due to devaluation of national currency, which pivoted around the tea industry. Multiple claims by the government to justify the transition to organic agriculture were compared to Lysenkoism by critics: for example, Anuruddha Padeniya, a member of the Presidential task force that carried out the transition to organic farming, claimed that Pliny the Elder had claimed that ancient Sri Lankans had lived for around
28 140 years while modern agricultural
methods have resulted in it being halved to 74 years.
Both Padeniya and Gotabaya Rajapaksa has associated the use of chemical fertilizer with chronic kidney disease (CKDu), but scientific research has pointed towards high hardness of water due to high mineral concentration mainly of fluoride and magnesium of the water in areas with a high prevalence of CKDu combined with high heat as the most likely cause. The World Health Organization also doubted that chemical fertilizer use alone could cause CKDu.
The banning of the trade of chemical fertilizers and pesticides produced a severe economic crisis, since the population expects to remain without income and without food. In November 2021, Sri Lanka abandoned its plan to become the world's first organic farming nation following rising food prices and weeks of protests against the plan. The government cancelled some measures, including lifting the ban on urea and importing 44,000 Tons of urea under the line of credit. Sri Lanka is seeking to introduce peacetime rationing of essential goods. On 29 May 2022 the government stated that the Yala season cultivation would fail with a forecast of 50% of the maximum harvest and that the government cannot provide fertilizer to save the season while rice stocks in the country will only be sufficient until September.
4 SOLUTIONS
For all the eel moves they have taken 1. For agricultural, rather than going for
direct application of organic farming, they should go for beach testing.
Water management and irrigation facilities
The farmers across India are heavily dependent on monsoon because, we have a very poor water management system.
Investment is required to create a state of the art water management system by setting up facilities for harvesting rain water, laying pipes across field to better the water supply across the length and breadth of the farmland, sprinklers system to automate the process of irrigation with minimal wastage of water, proper drainage system to collect the
excess water which will flow out while watering crops etc
Procurement of modern farm equipments
One of the main reasons for the lesser crop productivity is the minimal use of technology on the field. Capital expenditure is required in procuring modern equipments for speeding up the process of ploughing, sowing, manuring, harvesting etc.
Research in agriculture
In India, we have organizations like Indian Agricultural Research Institute (IARI) and The Indian Council of Agricultural Research(ICAR) which did a tremendous job in the first green revolution, but with passage of time, the government has reduced spending in agriculture research. Promoters has to collaborate with these organizations by sponsoring or jointly working in their research programs in the areas of improving seed and soil quality; harmless fertilizers, pesticides and insecticides etc.
Training programs for farmers Farmers in India, because of educational backwardness and poor living conditions didn't know much about farming technology. The farm workers need to be trained well in the modern tools and techniques to be used for agriculture purpose, for which investment is required
Storage infrastructure
In the recent days we have heard a lot about crops rotting in the government warehouses due to below par storage conditions. One of the prime responsibility of AEZ is to design warehouses with best in class storage conditions to protect crops from rotting.
Investment in branding and marketing
Apart from setting up the physical infrastructure, AEZ has to invest in building a brand under which all its farm produce can be marketed across India and abroad.
2. To overcome trade efficiency, they should depend less on import.
29 Instead, increase the production of
essential commodities in the country.
3. And to overcome from the budgetary deficiency they have to increase their revenue by increasing tax rate, VAT and decreasing expenditure.
4. To increase the tourism in the country they can host big festivals like Olympics, can also provide tourism packages with assurance of secured environment.
5 CONCLUSION
From above analysis we are with some conclusions,
1. Countries political decision making should be always according to the favour of country.
2. Go for slow and strong development rather than fast and weak decision making.
3. Make the SWOT analysis of your country and work on the weaknesses. Make your strengths more strong.
REFERENCE
1. https://en.wikipedia.org/wiki/Sri_Lanka 2. https://www.cia.gov/the-world-
factbook/countries/sri-lanka/
3. https://en.wikipedia.org/wiki/2019%E2%80
%93present_Sri_Lankan_economic_crisis#Ca uses
