The Srilankan Crisis

Sri Lanka, as we know it, is now facing its biggest economic challenge since the time it gained independence all the way in 1948. The country is note facing budget and trade deficits, hyperinflation, huge sovereign depts, and a devluating currency. THis political and eocnomical collapse of Sri Lanka’s economy can be seen as a warning to other countries foreshadowing the problems that may arise due to huge amounts of sovereign debt.

The lead to this crisis although blamed on covid by Srilanka, perhaps could be, as many scholars have blamed on, the former president and the demand influencing policies that he administrated. After the civil war in 2009, with a trade deficit of $3 billion, the ex-prime minister of Sri Lanka imposed tax cuts that made the government loose around $1.4 billion every year in the form of government revenue, and hence made it impossible for them to fulfill other macroeconomic aims.

In 2022, the inflation suddenly increased to 50% a year, the citizens experienced power and fuel shortages, famine, and hyperinflation of food prices, leading to protests. Work from home and online school started again, and the President fled the country.

In May, the situation continually worsened, and Sri Lanka was not able to pay its interest on foreign debt, and hence made international lenders hesistand to invest money into the country.

Sri lanks has a debt of around $1 billion to India, and around $7 billion to China. Both of these countries, have amended their loans, allowing Sri Lanka more time to pay, and this led to the Internaitonal Monetary Fund providing a $3 billian loan for Srilanka, along with the World Bank providing a $600 million loan in the previous year. 

The Sri Lankan government is now claiming that by restructuring nationalised businesses and privatizing the national airline, it will be able to raise money to pay off its debts.

Early in 2023, the nation enacted income taxes on those with greater incomes, with rates ranging from 12.5% to more than 36%.

In order to pay for essential purchases like food and fuel, it also increased additional taxes. The mass protests have now subsided, but the new president is trying to deal with a huge financial crisis.

So, let's hope for the best for Sri Lanka.

Information Curated from https://www.bbc.com/news & https://www.usip.org/?utm_source=usip.org