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Lessons From The Sri Lankan Crisis

How can mismanagement wreck a country?

Photo by Hendrik Cornelissen on Unsplash
Photo by Hendrik Cornelissen on Unsplash

The small island nation of Sri Lanka has been facing an unprecedented economic crisis. The situation has deteriorated so much in the past few months that the country is now in a financial "meltdown."

While President Gotabaya Rajapaksha, who came to power in November 2019, blames the pandemic, the Ukraine war, and other causes, there are other culpable factors.

Dwindling Foreign Reserves

Sri Lanka relies heavily on tourism for its foreign exchange. It is one of the largest sectors of its economy. Tourist arrivals, however, had dropped following the Easter Sunday terror attack in 2019.The pandemic-induced travel restrictions all but snuffed out the island's tourism industry and allied sectors.

Other than tourism, tea export, textiles, rice production, and agricultural products form the core sectors of the Sri Lankan economy. Textiles and garments make up more than half of its exports, and tea contributes about 17%. Russia is a significant tea buyer and contributor to the country's tourist numbers. The sanctions imposed on Moscow have put trade with the country in jeopardy.

Also, Colombo was heavily dependent on remittances from its citizens working abroad for its foreign exchange. The pandemic saw large numbers return home, especially from the Middle East, having lost their sole source of income due to lockdowns.

Inklings Of Trouble

The soaring food and fuel prices were the first reports to hit the news. Then came reports of nationwide daily power cuts and power outages. It was followed by alarming reports of postponed surgeries due to a lack of medical supplies. Newspapers suspended editions because of a newsprint shortage.

Shortsighted Policies

The issue was not power distribution. It had to do with acquiring power-generating fuels. To maintain currency reserves, the Rajapaksha government steeply undervalued the Sri Lankan rupee. The weakened currency made it prohibitively expensive to import fuel for power plants.

The administration's abrupt decision to restrict imports, specifically of fertilizers and food items, in mid-2021 has also contributed substantially to the present crisis. For an agri-based economy, the shortage of fertilizers was a severe blow. The food import restrictions were not compensated with measures to boost domestic production. The forced shift to organic farming and dwindling imports have threatened Sri Lanka's food security. Agriculturalists expect a 45% drop in rice yield (the island's staple grain).

Lacking a robust social security network or public distribution system, the island's citizens face tough days ahead. Welfare measures have been reduced to political tools to win elections.

The lack of foresight is evident in other areas too. Despite opening up the economy decades ago, the island has not put much thought into diversifying its export portfolio, nor have measures been undertaken to become self-reliant. For instance, the island located in one of the world's best fishing areas imports canned fish.

Ways Out

The government devalued the currency to improve its global credit ratings. Plans are underway to approach the IMF for assistance to borrow funds to revitalize the economy.

The fraught citizens are looking for a way out – quite literally. Passport applications have soared since the beginning of the year. A few have already reached Indian shores by crossing the Palk Strait in small boats.

Lessons For Everyone

While the Sri Lankan crisis may seem miles away and of little economic impact on a global scale, there are lessons here for everyone.

The country's dealings with Beijing and many of its megaprojects have already garnered the world's attention. Under the Belt and Road Initiative, the government has allowed China to lease its strategic ports and borrow heavily for infrastructure projects. With foreign reserves running low, this could become a huge concern.

China has a 99-year lease on Sri Lanka’s Hambantota port that can be extended to 198 years
China has a 99-year lease on Sri Lanka’s Hambantota port that can be extended to 198 years

Sri Lanka's dependence on imports to meet its energy needs is another warning bell. Short-sighted policies that do not address present and projected energy needs have led the country into turmoil. With sanctions against Russia, one of the world's largest energy exporters, the power sector in many countries is likely to face a crisis. The government's attempt to force organic farming on its people without sufficient planning and knowledge sharing has jeopardized the island's food security.

While no country can function or survive as an island, countries must explore and devise strategies to meet their basic food and power needs. Policies and policy changes should take ground realities into consideration. Or else, like Sri Lankans, citizens will be forced to confront the establishment.


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