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Sri Lankan Crisis—the China Factor

Aparna Shandilya

Sri Lanka is in the midst of a severe economic crisis, with reserves decreasing and the government unable to afford the cost of essential imports. In 2021, the Sri Lankan government declared an economic emergency due to rising food costs, a sinking currency, and rapidly depleting forex reserves. People have taken to streets protesting against the government.

In the midst of this economic nightmare, Sri Lanka's central government has looked to India and China for assistance as it tries to pull the country out of the crisis and calm public sentiment. The country's disintegrating economy is primarily due to a lack of foreign money, which has resulted in a large decline in imports of necessary goods.

 Imports are so crucial that the government had to postpone exams for millions of pupils due to a lack of printing paper. What a tragedy of China dependent economy! Here are the five points that have affected Sri Lanka's economy severely:

*    The pandemic has taken a toll on the country's tourism economy, which accounts for 10% of GDP. Due to the foreign exchange problem, several countries, including Canada, have recently issued travel restrictions to their citizens on visiting the island country. Such advisories from other countries are having a negative impact on business. The United Kingdom, India, and Russia are the main sources of inbound tourism to the island nation.

*  The government's decision to prohibit the use of chemical fertilisers in order to transition agriculture to 100% organic had a negative economic impact. Experts predict that this legislation would have a tragic effect on agricultural development because organic farming reduces output by half. Moreover, the increased cost of staples like rice and sugar, allegedly due to "food mafia" hoarding, has exacerbated challenges.

*  A massive foreign debt burden of approximately $5 billion with China alone is a major contributor to this crisis. Sri Lanka is repaying a $1 billion loan acquired from Beijing in 2021. It also owes a large sum of money to India and Japan. The country's foreign currency reserves were approximately $1.58 billion as of November, down from $7.5 billion when Gotabaya Rajapaksa took office in 2019.

*  The supply of foreign exchange was harmed when forex reserves fell from more than $7.5 billion in 2019 to roughly $2.8 billion in July 2021, increasing the amount of money Sri Lankans had to pay to buy the foreign exchange required to import goods. As a result, the value of the Sri Lankan rupee has plummeted.

*  Sri Lanka's reliance on imports for essential goods like sugar, pulses, cereals, and pharmaceuticals has compounded the country's issues, as the country lacks foreign currency to pay for import expenditures.

According to Ashoka Ranwala, president of the Petroleum General Employees' Union, the situation in Sri Lanka is so dire that the government had to shut down its only fuel refinery because it ran out of crude oil stockpiles. Inflation, which topped 15.1% last month, is wreaking havoc on the economy. Food inflation has surged to 25.7%, according to government figures. For example, the price of a 400 gm pack of milk increased by $0.90 over the weekend.

In addition, Laugfs Gas, Sri Lanka's second-largest gas supplier, raised costs by 1,359 rupees ($4.94) for a 12.5 kg cylinder, according to a company statement. The current economic crisis in Sri Lanka is caused by a foreign currency shortage or a balance of payments (BOP) crisis. This means that Sri Lanka imported more than it exported last year.

 FDI into Sri Lanka has declined to $548 million in 2020, according to government figures, from $793 million in 2019 and $1.6 billion in 2018.

When foreign direct investment (FDI) into a country falls, so does the foreign money in the country's reserves. Sri Lanka also refuses to accept a loan from the International Monetary Fund (IMF).

China has been Sri Lanka's top bilateral lender and FDI source for the past two decades, but the latter's debt to the former has grown to over $2 billion and is due in 2022. In conclusion, Sri Lanka is experiencing a foreign currency shortage, which is significantly limiting its ability to import crucial goods. As a result the country is witnessing food riots and mass unrest.

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Frontier
Vol 54, No. 43, April 24 - 30, 2022