Crisis in Sri Lanka

In News

• Sri Lanka is facing a massive economic collapse with dramatic events seen on its political stage.

More about the news

• Economic Crisis:
  • Sri Lanka is under the grip of an unprecedented economic turmoil, the worst in seven decades. 
  • The country is crippled by an acute shortage of foreign exchange that has left it struggling to pay for essential imports of fuel, and other essentials such as food, and medicines.
• Humanitarian Crisis:
  • Tropical Sri Lanka normally is not lacking for food, but people are going hungry. 
  • The U.N. World Food Program says nearly nine of 10 families are skipping meals or otherwise skimping to stretch out their food, while 3 million are receiving emergency humanitarian aid.
  • Doctors have resorted to social media to try to get critical supplies of equipment and medicine.
  • Growing numbers of Sri Lankans are seeking passports to go overseas in search of work. 
  • Government workers have been given an extra day off for three months to allow them time to grow their own food.
• Political Crisis:
  • There has been persistent anti-government protests since three months over the government’s failure to arrest or address the long-simmering economic crisis.
  • The escalation of citizens’ anger pushed the top two leaders (the President and the Prime Minister) to agree to step down.
  • Speaker Mahinda Yapa Abeywardena will be made Acting President as per the Constitution.
  • Parliament will be convened to elect a President from among its members, to pave way for an interim, all-party government. 

Reasons behind the crisis

• Government debt and BoP crisis:
  • The government owes $51 billion and is unable to make interest payments on its loans, let alone put a dent in the amount borrowed. 
  • Its currency has collapsed by 80%, making imports more expensive and worsening inflation that is already out of control.
• Tourism:
  • Tourism, an important engine of economic growth, has sputtered because of the pandemic and concerns about safety after the terror attacks in 2019. 
    • In 2019, Easter suicide bombings at churches and hotels killed more than 260 people. 
• Agriculture and food prices:
  • In April 2021, the govt. suddenly banned imports of chemical fertilizers. 
  • The push for organic farming caught farmers by surprise and decimated staple rice crops, driving prices higher. 
  • To save on foreign exchange, imports of other items deemed to be luxuries also were banned. 
  • Meanwhile, the Ukraine war has pushed prices of food and oil higher. 
  • Inflation was near 40% and food prices were up nearly 60% in May.
• Corruption: 
  • Economists say the crisis stems from domestic factors such as years of mismanagement and corruption.

International efforts

• International Monetary Fund:
  • The government is in negotiations with the IMF on a bailout plan.
• United Nations:
  • Earlier in June, the United Nations launched a worldwide public appeal for assistance. 
  • So far, projected funding barely scratches the surface of the $6 billion the country needs to stay afloat over the next six months.
• Indian support:
  • So far Sri Lanka has been muddling through, mainly supported by $4 billion in credit lines from India.
• Other countries:
  • Sri Lanka has also sought more help from China. 
  • Other governments like the U.S., Japan and Australia have provided a few hundred million dollars in support.

Impacts on India

• Export:
  • Sri Lanka’s share in India’s total exports has declined from 2.16 percent in FY15 to just 1.3 percent in the first 10 months of FY22.
• Shipping:
  • If the current situation in the island nation persists, it could cause a major disruption to the normal functioning of the Colombo Port. 
  • This would be detrimental to India’s interest. 
  • The port handles over 30 percent of India’s container traffic and 60 percent of its trans-shipment. 
• Investments:
  • India has had a substantial investment in Sri Lanka in areas including real estate, manufacturing, and petroleum refining. They all might be adversely affected if the crisis continued. 
• Migration:
  • Also, the continuing Sri Lankan crisis could compel many Sri Lankans to leave for India for their survival. 
  • Already, scores of them have fled from the island nation to India.
• Silver lining:
  • Several flights of Sri Lankan Airlines, Air Arabia, Jazeera Airways, Gulf Air and Air AirAsia Malaysia are depending on Indian airports starting from May onwards, giving additional revenue to Oil Marketing Companies(OMCs) airport operators and respective state governments.
  • It has boosted aviation turbine fuel (ATF) sales in South Indian airports like Thiruvananthapuram, Cochin and Chennai.

Way ahead

• Sri Lanka sits in one of the world’s busiest shipping lanes, so letting a country of such strategic significance collapse is not an option.
• Sri Lanka has been a strategically important partner for India. 
• Even as some of our businesses are hit, and some try to fill the void created by the Sri Lankan crisis, India’s assistance in this time of need will only lead to better ties with the island nation that has long been leaning towards the Chinese camp.

Source: TH