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In the last article titled ; " India’s difficult neighbourhood "( https://www.bharatamrising.com/india-s-difficult-neighourhood )the looming economic crisis in Srilanka was discussed. The following was highlighted ; .
“With the COVID-19 pandemic, the situation in Srilanka worsened, largely due to the significant loss of tourism earning, taken together; diminishing foreign exchange reserves, the debts, the circumstances have put Sri Lanka in a vulnerable position. The bggest worry was that Sri Lanka cannot address its problems as merely a domestic political issue. Tackling Sri Lanka’s external sector vulnerabilities, including the shortage of foreign currency, will require support from external parties, whether China, India, the United States, or even international organizations such as the IMF or World Bank. Thus far, Sri Lanka has excessively relied on China to tackle its external sector vulnerabilities while economic relations with India seem to remain stagnant. At the same time, Sri Lanka tries not to irritate India. Against this backdrop, Sri Lanka is now struggling hard to balance between China, India, and domestic nationalists, all the while trying to save the country from a potential economic crisis. Thus far, it does not look easy”.
The Economic Crisis led to Declaration of Emergency
Barely two months have passed since we wrote this and the Govt of Srilanka has now declared an emergency. Sri Lanka’s Parliament on Monday (September 6) approved a national emergency. The government said the emergency was required to check soaring prices of food and hoarding of essentials by a “food mafia”. As expected the Opposition called this action to be taken “in bad faith, with an ulterior motive of stifling the fundamental rights of the people and a move towards authoritarianism.
In Parliament, Opposition members argued that there was no need for an emergency, as other legislation were available to check hoarding and cap food prices.
The Vicious Circle.
The 2019 Easter attacks, pandemic and some irrational, unwise and hasty steps taken by the Govt led the country into a vicious circle. The attacks and covid almost ruined the tourism which is Sri Lanka’s top foreign exchange earner simialrly, the tea and garment industries have also been hit by the pandemic, adversely affecting exports.
Sri Lanka had a huge foreign debt burden also and was unable to repay those loans because of critically low foreign exchange reserves. At the end of July, the country’s foreign exchange reserves were $ 2.7 billion, while it needed to repay foreign debts of about $ 4 billion. Although it managed a currency swaping agreement with Chinese of 1.5 billion dollars but that will not ease the situation. A currency swap is a loan agreement for repayment with interest in the local currency.
So in order to save its already low foreign Exchange reserves Sri Lanka had cut down its imports ; It stopped imports of vehicles, edible oils, turmeric, etc in a bid to save precious foreign exchange. Sri Lanka also imports many of its essential food items, including pulses, sugar, wheat flour, vegetables, and cooking oil.
So, with these items not being imported this has led to shortages and also increased the prices of these essential food items.
The Govt in order to mitigate the crisis printed Rs 800 billion by the Central Bank of Sri Lanka over the last 18 months now that has also led to increase the liquidity in the economy. This infusion of money, and the consequent increase in demand without a corresponding increase in supply, has led to increase in inflation.
This in turn has devalued the currency, made imports costlier and further increased the debt and put the forex reserves under more pressure.
The government’s decision, under the emergency, to fix prices of all essential items has further hit imports, as traders are reluctant to buy at high prices internationally without a promise of returns from sales in the markets at home.
In addition, there is a restrictive import licensing regime.
So no wonder that the newspapers are reporting presence of long queues outside the government-owned grocery shops . On top of that, some experts claim, that the ban on chemical fertilizers in March, as President Rajapkasa announced that the country would grow only organic food henceforth, trying to become the first country to do so, may further aggravate the crisis. This was aimed at saving foreign exchange in imports of these fertilizers, but now it is feared that the sudden change, could adversely affect yields of vegetables and rice.
Conclusion
This is surely not a political crisis but it can lead to one. Can India with its own economy facing challenges due to Covid be of any help to its southern neighbor. China which has already in March helped the Srilankans with 1.5 billion dollars currency swap has deeper pockets than the Indians will undoubtedly use this opportunity to further entrench itself here . India is one by one losing its grip over its neigbours , Afghanistan is the latest in the list . These are the opportunities that India must not miss to once again resurrect its importance in its neighborhood.