10 Apr 2022  |   06:08am IST

Lessons from Sri Lanka’s economic crisis

Sri Lanka is in the throes of an unprecedented economic crisis, the worst since the island nation attained its Independence in 1948. The island nation has to repay a debt of about $4 billion in the rest of this year, including a $1 billion international sovereign bond that matures in July.

Sri Lanka faces daunting challenges with debt and is enduring its worst economic crisis in recent memory with shortages of medicine, fuel, fertiliser, and milk powder. Daily power outages are lasting for hours.

Sectors bringing in foreign exchange have been badly hit due to the COVID-19 pandemic and the industries that drive Sri Lanka's economy, like tea, garments, and spices, have also been adversely affected. Tourism is another sector that brings in foreign exchange that is struggling to survive. This situation has also resulted in India facing a possible refugee crisis with people, especially from the northern part of Sri Lanka trying to escape onto the shores of Tamil Nadu, mostly in Rameswaram district. 

India has extended aid via a $1 billion line of credit so that the island nation can purchase essential supplies. After an agreement to extend the line of credit was inked, Ministry of External Affairs (MEA) spokesperson Arindam Bagchi said India has always stood with the people of Sri Lanka and will continue to extend all possible support to the country.

Sri Lanka's economic collapse has a number of important lessons for the world, particularly India, but in order to grasp them, we must take an honest look at what exactly went wrong.

Sri Lanka's foreign debt has been steadily rising since 2010. Sri Lanka owes most of its debt to countries like China, Japan, and even India to a certain extent. Other than to countries, Sri Lanka also owes money to reputed international organisations like the World Bank, and the Asian Development Bank, and has also borrowed from the international market, which comes under the sector of market borrowing.

The COVID-19 pandemic also dealt a heavy blow to Sri Lanka’s economy. The tourism industry went into major losses and international credit rating agencies moved to downgrade the island nation’s economy. As a result, Sri Lanka’s exports dipped, while its imports went up. 

The government’s tax cuts and switch to organic agriculture further squeezed revenues and increased pressure on the indebted economy. The ill-advised policy of shifting to organic farming dealt a blow to the island nation's agriculture arena. The crisis was in the making for almost a decade, largely due to the country’s excessive dependence on imports and borrowings for a raft of massive infrastructure projects. Sri Lanka’s external debt stands at $45 billion.

What are the lessons that India can learn from the Sri Lankan economic crisis?

One of the biggest lessons countries can learn is that the Sri Lankan crisis did not happen overnight. The nation suffered from severe structural problems and these were blatantly ignored for the last few decades. India too has structural problems and there is a need for them to be rectified if it does not want to go the Lankan way. 

Rather than implementing sometimes painful but beneficial long-term policies, successive Sri Lankan leaderships went for populist, election-in-mind policies. That should sound familiar to India, especially since many State governments (Punjab, Uttar Pradesh) have promised a lot of unviable freebies. 

Two, another reason that was given for the crisis is Sri Lanka’s dalliance with big-ticket projects that did not produce enough value to the economy. 

Some analysts say the country accrued more debts when, in the 2000s, it began undertaking massive infrastructure projects – but with low returns. Many of these projects were undertaken by firms from China or backed by loans from China. By promising to finance and construct mega projects, China, analysts say, managed to get a strong foothold in Sri Lanka, right at the southern doorstep of India. India's leaders, who tend to go for such big-ticket projects as the Bullet Train and massive airports, should keep this in mind.  

Lastly, another lesson is the need for greater export diversification. Sri Lanka depends too much on tourism and exports of tea and garments, which have been adversely affected by the Covid-19 pandemic and now the war in Ukraine. India too, needs to go in for greater export diversification. And the simplest way to diversify is to expand the existing product range.

These lessons will go a long way in addressing challenges, and making sure that India does not go the Sri Lankan way.


IDhar UDHAR

Idhar Udhar