Author: Aashi Jain, I year of B.A.,LL.B.(Hons.) from National Law University and Judicial Academy, Assam
Introduction
As defined by IGI Global Dictionary, “Economic crisis is a situation when the economy has a slowdown of economic activities due to financial/bank crisis, inflation, currency crushes, or debt”[i].
In case of Sri Lanka, Sri Lanka, a south Asian country is facing its worst economic crisis since its independence in 1948. The country is facing with a shortage of food, fuel and medicine and inflation has skyrocketed leading to an increase in the prices of basic commodities[ii]. Boats filled with refugees are arriving at the Indian shores so as to seek refuge.
People are being forced to stand in queues by leaving their jobs or businesses under the scorching sun so as to get hold of basic commodities and fuel. People in queue don’t even know whether they will get hand of the same, because the necessities, ration, fuel gets over quickly.
And hence, the people have taken to the streets showing their discontent towards the Rajapaksa government, the protest has turned violent in some parts of the country demanding the President’s resignation.
The President Gotabaya Rajapaksa had announced a state of emergency on 1st April, 2022, following violent protests outside his home, because of this official notification the persons who are considered as suspects can be arrested or imprisoned by the authorities, Rajapaksa said that the decision to impose emergency was done in the "interests of public security, the protection of public order and the maintenance of supplies and services essential to the life of the community[iii]". But there is news that there is a brutal treatment done by the police on the protestors[iv].
Is this really the fair treatment that must be received by the citizens of Sri Lanka, where the President says that the emergency is being imposed so as to achieve public peace, is this really peace?
The United Nations Human rights office has however mentioned that the emergency orders “must comply with international human rights law” and “should not be used to stifle dissent or hinder peaceful protest”. “The UN human rights office will continue to closely watch developments,” this is a statement released by the agency’s spokesperson.
Pondering about the History of Sri Lanka
The crisis that Sri Lanka is currently facing didn’t take place overnight, it took place at a stretch, globalization can be termed as a leading factor of the same, as it helps the country to borrow, so as to help in building its infrastructure, like ports, roads, power plants, airports, etc. and hence earn profits, in case of Sri Lanka the subsequent governments that came up in the parliament took loans to build its infrastructure, which led to debts as the country was unable to pay the same, hence was caught in a situation of what is known as debt trap.
The situation in Sri Lanka can be termed as that of a twin deficit, deficit in terms of trade deficit and budget deficit. Sri Lanka’s imports are more than its exports, a situation of trade deficit, and the government contributes more to expenses than to revenues, which leads to Budget Deficit. The amalgamation of both these deficits lead to an economic crisis in Sri Lanka.
The country has involved itself in taking loans for building its enormous projects like the Hambantota International Port, which was built with an aim to bring big ships to the region, it was built with the help of China Harbor Group – a Chinese Company, the money with which the port was constructed couldn’t get paid off by Sri Lanka, also it didn’t generate much revenue for the country, and hence the port got leased to a Chinese company[v](one of the two bids). So it is safe to conclude that the country has been involved in a struggle to pay its debts for a long time.
Later in 2019, the then Finance Minister Basil Rajapaksa passed a series of tax cut, so as to help the economy that was devastated by the Easter bombings, but the lower tax rates made credit rating agencies to degrade the credit rating of the country, also covid-19 reduced the number of tourists that visited Sri Lanka. This affected the revenue of the government.
After this in 2021, the government banned the use of chemical fertilizers with a rationale of protecting the heath of the citizenry, however, critiques argue that the main intention was to stop imports of fertilizers which were traded out of the precious foreign exchange reserves.
The crisis in Sri Lanka
The island country is facing with an unprecedented political and economic crisis. The inflation rate has gone as high as 30% in the month of March. The cost of living has increased dramatically for people living in the country. Many problems has compounded this crisis. Sri Lanka has already faced terrorist attacks in the past like the Easter Sunday Bombing, which were claimed by the Islamic State which had created a disarray in the stability of the country. Many tourists had shortened their trips or in some cases canceled them altogether, this actually backfired the revenues of the country whose major dependence is on the Tourism industry for revenue, but then the Rajapaksas swept the elections in 2019 and hence promised to the people that they will restore the stability and security of the country, and hence inherited an economy that had huge debts, but the Rajapaksas made it much worse and a fact to be mentioned is that the Sri Lankan Rupee is the world’s worst performing currency this year[vi], according to the Financial Times. Also, the Covid-19 worsened the situation, as the lockdown led to a decrease of the tourists in the country. The war between Russia and Ukraine added to its woes, as the cost of fuel increased. The cash strapped Country has taken loan from India, China and Bangladesh. In June 2021, Bangladesh loaned Sri Lanka 200 million dollars which got renewed in December, Sri Lanka has also asked China to postpone or to reschedule its debt. In February it had asked from India 500 million dollars so as to buy oil. India has also provided a credit of 1 billion dollars so as to pay for basic necessities like food and medicine[vii]. Also the foreign exchange reserves has dropped.
Why are the people of Sri Lanka infuriated against the Rajapaksas?
The protestors are carrying slogans such as “Go Home Gota”, they are dissatisfied with the president and his relatives, which makes up the ruling party clan. The dissatisfaction has been driven by unacceptable food shortages, lengthy power cuts, paucity of medicines and fuel for vehicles. Also, the country is currently in political turmoil, there has been mass resignations from various ministers, the ruling party also known as Podujana Permuna, lost its majority in the 225 member parliament, when it lost 41 seats as members pulled out of the coalition government so as to continue as independent groups, hence the party was left only with 104 seats. Even the Finance Minister has resigned from his post and hence a new minister was appointed, but even he resigned.
The food insecurity got created by a decision of the government, when it announced the ban of chemical fertilizers and supported the use of organic fertilizers instead and the reason as provided by the president was to control the negative health effects that the chemical fertilizer contains, however the critiques argue that the main reason was to reduce imports so as to preserve the foreign reserve, and this was a major blow for the farmers who couldn’t get hold of organic fertilizers due to its shortage and also due to lack of training[viii] on how to produce crops without chemical inputs and hence leading to losses for them, the irony of the same is that the farming community actually supported Gotabaya, but this ban led them to protest against their hero.
The anger over economic hardships is mushrooming and the young generation through the use of the internet is protesting against the government whereas many others have taken up to the streets, which is displaying national unity against the government.
Where is Sri Lanka looking for help?
As of now Sri Lanka requires 500 million USD, to pay off its International Sovereign Bonds, a country in order to pay its bond amount must have dollar reserves, it received a facility of 1.5 billion USD, raising its reserves to 3.1 billion USD. But this amount can’t be fully utilized to pay its dues as economists say that if whole of the reserves are utilized to pay the debt, then the country will face dire consequences, so it will be quite dangerous to do so, and it will be gruesome if the credit rating agencies further downgrade the credit rating in Sri Lanka.
Currently the president has formed an advisory board so as to have a discussion with the International Monetary Fund regarding the injection of money in the country. Even India and China are willing to provide financial help to the stressed country, both these countries are looking for a certain sort of influence over the island country. Under the regime of Rajapaksas the country was more inclined towards China, but the current assistance provided by India shows that Sri Lanka has showed faith in India.
International Sovereign Bonds
“International Sovereign Bonds is a facility obtained by a Government from the Open Market for its financing needs. The Government will issue bonds to the market, and it is the government that takes responsibility for settling these bonds.” The government takes responsibility of paying these bonds at a comparatively higher rate of interest, and has to pay in a shorter length of time[ix]. Also, it is said that these loans can be obtained at ease.
Conclusion
Sri Lanka is currently jostling with its economic and political crisis, a period of dearth of food, fuel, medicine, a time when it’s foreign exchange reserves is plummeting, the credit rating agencies downgrading the credit rating of the country, the country losing its revenue because of a reduction in tourism, with a heavier outflow of money then the inflows, there is a deficit in the Balance of Payments.
The country is preparing to have discussions with the International Monetary Funds (IMF) for a bailout, also India and China are financially helping the country. Some economists are pointing to restructure the payment of International Sovereign Bonds, which are soon to mature, as this will help in strengthening the reserves of the country, and will also help in supplementing the shortages created.
[i] Economic crisis definition, IGI Global Dictionary. [ii]Jessie Yeung, “Sri Lanka is facing an economic and political crisis”, April 7, 2022, CNN. [iii]Rukshana Rizwie, Sophie Jeong and Alex Stambaugh, “Sri Lankan President declares state of emergency following violent protests over economic crisis, April 2, 2022, CNN. [iv] United Nations, “Sri Lanka: Mishandling of economic crisis triggers alarm over rights violations”. [v] Deborah Brautigam and Meg Rithmire, “The Chinese debt trap is a myth”, The Atlantic. [vi] Hudson Lockett, “Sri Lanka’s currency plunges to world’s worst-performing in economic meltdown”, April 6 2022, Financial Times. [vii]Alia Chughtai, Rehana Thowfeek and Mariam Ali, “Sri Lanka’s economic crisis and political turmoil”, April 7, 2022, Aljazeera. [viii]Nicholas Gordon, “How COVID and a nationwide pivot to organic farming pushed Sri Lanka’s economy to the brink of collapse”, Fortune. [ix]Staff Writer, “Economists question decision to repay sovereign bonds amidst depleting reserves, Newsfirst.