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Sri Lankan Economic Crisis: An Insight

  • Purvi Agarwal and Shubhangi Saxena
  • Jan 5, 2022
  • 4 min read

Updated: Jan 7, 2022


Sri Lanka, situated south of India, is a country whose per capita income is almost twice of India’s. Additionally, all its growth and social indicators are equal to that of Kerala (a southern Indian state) if not better. In recent times, this country has been going through a tough phase, mounting inflation, depreciating local currency, the balance of payments crisis, and deepening debt burden, accelerated by the onset of the COVID-19 pandemic, eventually manifesting into a state of economic emergency.

Sri Lanka is a tourism-rich country with the travel sector contributing 10% to GDP, thus, getting a lot of its foreign exchange from tourism. This sector has been hit hard due to the COVID-19 worldwide travel restrictions. Tourism has come to a standstill.


On 30th August 2021, the President of Sri Lanka, Gotabaya Rajapaksa, declared an ‘economic emergency’. With falling currency and forex reserves and rising inflation, the country is facing its worst economic crisis in the last 73 years. The foreign exchange reserves have dipped to $2.8 billion as of July 2021. The Sri Lankans have had to spend extra on buying foreign exchange to ensure the availability of basic food supplies in the country. They have been printing money at unprecedented volumes to buy foreign exchange to import goods. This has caused the Sri Lankan rupee to depreciate significantly (7.5% to American Dollar).


Due to the dearth of foreign reserves, the Sri Lankan govt has had to borrow to pay for its imports, thereby, raising the debt on the government, thus, adding to the existing hardships. Moreover, the huge loans taken from China to fund new projects have pushed the country into deep trouble. The prices of basic food items have risen tremendously. The balance of payments adversity has pushed up the prices of essential commodities like potatoes, sugar, rice, and onion. Long queues can be seen outside ration shops so that people can buy necessary food items before prices rise again. To prevent the condition from worsening further and ensure food security an emergency has been declared. The president appointed Major General Niwunhella as the Commissionaire General of Essential Services and the army has been given the power to seize food stocks held by traders and retailers. They also have the power to regulate prices to ensure that essential items are sold at government prices. High prices in the global market and the falling local currency due to the Covid-19 Pandemic have played a major role in increasing prices, the government is blaming hoarders.


The power given to the army to seize supplies from traders may further dissuade them from bringing in fresh supplies. The resulting drop in supply will increase the prices further. The ban on forward contracts and spot trading of Sri Lankan rupees at above 200 rupees to an American dollar by the Central bank may fuel the situation even more.


In April, it was declared that only organic farming will be allowed in Sri Lanka. The government also banned the import of chemical fertilizers and any other agrochemicals intending to make Sri Lanka the first country with Organic-only Agriculture. This shift required a large domestic production of organic fertilizers but the situation is very miserable. According to experts the fall in the agriculture sector will aggravate the situation further. Stating that the long-term benefits of organic farming are worth the short-term problems, the Sri Lankan government is planning to continue the 100% Organic Agriculture plan.


Year-on-year inflation rose to 6% in August 2021, mainly due to high food prices. The economy has shrunk by a record of 3.6%. In totality, we can say that the Sri Lankan economy is going through a monetary crisis, a price crisis as well as a supply crisis.


This entire economic meltdown in Sri Lanka also comes at a time when the covid cases and deaths have been rapidly rising. A state of emergency was declared in Sri Lanka on August 30, 2021 under Public Security Ordinance. The opposition pointed towards the use of military tactics to solve financial problems and the UN rights body has also expressed its concern that the role of the military may further expand in civilian functions.


In 2022, the crisis has aggravated, food inflation is as high as 11.1%. The government owes a debt of more than $5 billion to China and a further $1 billion to Beijing to help the severe financial crisis. The government also fears bankruptcy in 2022. To ease the situation temporarily, the govt has been using measures like importing foods, medicines, and fuel from India, along with currency swaps from India, China, and Bangladesh and loans to procure petroleum from Oman. These loans provide only short-term relief and need to be paid back at high-interest rates, adding to Sri Lanka’s debt load. According to the World Bank, 500,000 people are below the poverty line since the beginning of the pandemic, this is equal to five years’ progress in the battle against poverty.


Though globally economies have been severely hit due to the Covid-19 restrictions and the tourism sector, in particular, has undergone a major crisis, Sri Lanka like most countries is looking at multiple opportunities to tide over the challenges.

By:-

Purvi Agarwal

Shubhangi Saxena

(2nd year)

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