09 Apr Sri Lanka Crises
Sri Lanka Crises – Today Current Affairs
(GS Paper-II, Polity,Constitution,Governance,Social Justice and International Relations)
Source: Indian Express
Today Current Affairs
What is the issue?
The critical shortage of foreign currency has pushed the Sri Lankan government unable to pay for essential imports, including fuel and it has led to huge power cuts lasting up to many hours. Ordinary people of Sri Lanka are also dealing with the issue of inflation.
Reasons for the issue : The Hindu Analysis
The worst crisis in several decades has its roots in economic mismanagement by various governments in succession that have created and sustained a twin deficit – a shortfall in budget along with the current account deficit.
The present crisis is the result of deep tax cuts promised by Rajapaksa during a 2019 election campaign that were enacted months before the COVID-19 pandemic, which wiped out parts of Sri Lanka’s economy.
Further the country’s lucrative tourism industry and foreign workers’ remittances were hit hard by the pandemic and as a result of which credit ratings agencies downgraded Sri Lanka and locked it out of the international capital markets.
As a result of which Sri Lanka’s debt management programme, which depended on accessing those markets, derailed and foreign exchange reserves fell by approx 70 per cent in two years.
The government’s decision to ban all the chemical fertilisers in 2021,which was reversed later, also hit the country’s farming sector and led to a drop in the critical rice crop.
Crises and Political Developments : The Hindu Analysis
The economic distress in Sri Lanka has led to a political crisis as well. The Mahinda Rajapaksa ministry has resigned in group to allow the prime minister to reconstitute the cabinet. The governor of the central bank has also resigned after taking the responsibility for economic mismanagement.
The situation has worsened after protestors encircled the presidential palace and demanded for the Gotabaya Rajapaksa to resign. They raised the slogan “Gota Go Home”, following which the administration has invoked emergency laws and declared curfew in the city.
External help & future Course of action : The Hindu Analysis
The Rajapaksa’s administration and the Central Bank of Sri Lanka (CBSL) have ignored the advice of the experts and opposition leaders to seek help from the IMF even when the risks were high. But with the rise in oil prices and Russia’s invasion of Ukraine, the government has prepared a plan to reach the IMF.
The IMF is going to discuss the possible loan program with the Sri Lankan authorities in the coming days,as mentioned by an IMF spokesman.
Before moving to the IMF, the Sri Lankan Government devalued its currency steeply, which resulted in rise in inflation and adding to the pain of the public, many of whom are enduring hardship and long queues.
The Rajapaksa has also looked for the help from India and China, especially assistance on fuel from India. The diesel shipment under a $500 million credit line signed with India is expected to reach Sri Lanka soon. Also Sri Lanka and India have signed a $1 billion credit line for importing essentials, including food and medicine, and the Rajapaksa government has sought at least another $ 1 billion from India.
China has provided the Central Bank of Sri Lanka (CBSL) $ 1.5 billion swap and a $ 1.3 billion syndicated loan to the government, further China is considering to offer another $ 1.5 billion credit facility and a separate loan upto $ 1 billion.
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