Geopolitical Situation in Sri Lanka

What happens when a billion-dollar economy goes into crisis? We have seen the case of India and are fortunate enough not to experience the same again. However, what about Sri Lanka, a nation whose per capita GDP is twice as much as India? It is better in terms of the SDGs, health care, infrastructure and trade when compared to India. So, what has happened, and why has the president declared a state of emergency?

The Situation in Sri Lanka

On September 1, President Gotabaya Rajapaksa declared a state of economic emergency in Sri Lanka under Part II of the Public Security Ordinance. It is because of the dwindling foreign and forex reserves in the country. There is a full-scale economic meltdown; today, foreign reserves are one-third of what it was in 2019. The value of the currency has reached 230 Sri Lankan rupees to a dollar. The country is in a substantial monetary, price, and supply crisis. The people are lining up in front of ration shops that were earlier available to them much more accessible. The president has appointed Major General NDSP Niwunhella as Commissioner General of Essential Supplies to ensure a smooth and steady flow of essential commodities. He is now responsible for raiding and checking warehouses to stop hoarding as the country lacks essentials. Inflation is beyond the point where it can play the devil for the country's economy.

What is there to fear?

  1. The country's foreign reserves are a third of what it was in 2019. It has reached $2.8 billion from $7.5 billion. That means there is not enough money within Sri Lanka to import essentials such as food products for its citizens; this is a primary concern as Sri Lanka is not an agricultural nation. 10% of its GDP comes from the tourism sector, which has already suffered due to COVID-19. Consequently, now people have to buy rations at a fixed price. The minister of petroleum has requested people to carefully use fuels as the government cannot import fuels for the time being.

  2. Due to this, the economy shrank by 3.6%; inflation has crossed a particular mark. The Cash Reserve Ratio has doubled from 2% to 4%. Banks are offering high interest rates, which may seem profitable from investors' point of view, but it is not because of the deep economics. Higher the interest rates, weaker the economy and higher the inflation. Therefore there are not many investments here. The dollar inflow has stopped; slowly and gradually; Sri Lanka is now transforming into a closed economy from an open economy. The model which India followed a long time ago, probably before 1991.

  3. Growing the interest rates and loans payment, the government cannot import goods and essentials in the upcoming debt payment dates. 80% of the government's revenue is spent on the cost of interests; the island nation is sinking under pressure from China's debt. It has to pay more than $3 billion to the lenders, and it is taking more and more loans for its payment. The president has taken a $5 billion loan from China, $308 million from Beijing, $50 million from Dhaka, adding a $100 million new loan from Bangladesh and $787 million from the International Monetary Fund.

  4. The Chinese influence in the country is growing with the Colombo Port City Project. The government has agreed to conditions given by the Chinese and has also leased the Hambantota Port for 99 years. Chinese dominance could be felt from the incident where a ship carrying radioactive material reached the shore of Sri Lanka's port, and the navy was not allowed to check, and it returned. For China, it is helpful in their Belt and Road Initiative and promotes its influence in the Indian Ocean.

Reasons Behind the Crisis:

  1. COVID-19 Pandemic: The pandemic has affected everything globally, so the Sri Lankan crisis has also been affected. The tourism sector, which alone contributes to 10% of the country's total GDP, collapsed. The inflow of foreign currency slowly stopped. Around 5000 people are testing positive with 200 deaths per day which is much higher in a country with just 2.1 crore population. When we compare these figures to the Indian population, it would be around 4,00,000 positive cases with 13500 deaths per day—all of this with the best health care system. The Lankan health care system is as good as in the state of Kerala.

  2. The Falling of the Sri Lankan Rupee is another reason as it directly points towards the economy's weakening. With this, the payment amounts also reach higher and higher because when the loan or credit was taken, a dollar was 180 Sri Lankan rupees, now it is 230.

  3. The 100% Organic Farming Policy: It was introduced by President Rajapaksa. With the announcement of this policy, whole Sri Lanka was supposed to use only organic products such as compost instead of chemical fertilizers. The point is that the decision was taken without much consultation with the scientists. Therefore, the consequences are apparent. Sri Lanka presently could only produce 2.5 million tonnes of compost which is alone required by paddy. Therefore, it will have to import compost. The economy presently is short of foreign reserves. There is a steep fall in tea export, i.e. by 50%, and the export of other spices like cinnamon and cardamom have also suffered. The exports of these agricultural items, which contributed to 10% of the country's GDP, were jeopardized. The whole amount is equal to $ 1.25 billion. The damage caused by this decision is enormous.

Ms Vardhana, former Central Bank's governor, said, "This organic business is a dream with unimaginable social, political and economic costs."

Government's Response to the Crisis

The government's response has not been very effective. The first thing is declaring a state of emergency, appointing significant generals, and fixing up prices of essential commodities. The central banks stopped traders from exchanging 200 Sri Lankan rupees for a dollar which is a trouble for importers as they cannot have it even if they want. The government has still upheld its decision of using organic compost for farming and has promised its supply. However, by this time the agricultural produce has already gone down by 50%. The government is seeking help from other countries in terms of currency swaps to ease future payments.

Condition of Citizens in Sri Lanka

The Sri Lankans are affected majorly. Their rights have been denied, food security has been compromised, they have to stand in long queues for ration amidst the pandemic, and they have to rush for regular grocery items which were earlier easily accessible. Prices of commodities have almost doubled. They have to stop the imports, and payments received in foreign currency should be deposited in Central Banks. The government also had to impose a lockdown, and people are now expected to stay in homes with limited rations. The farmers who would have got profits from their products have to sell them to the government. Overall, the condition of citizens is the result of mistakes by the government.

India's Stand

India has been a strategic ally of Sri Lanka from post-colonialism, and it has helped it in various ways. Both countries share economic interests. Earlier this year, Sri Lanka has asked for help from India to combat China's growing influence; it is looking for a boost in security and defence ties with India. The government of Sri Lanka is also looking for a partnership to expand bilateral cooperation in maritime security. India has issued a unique line of credit to Sri Lanka of $50 million to counter terrorist activities in the nation. India has sent 150 tonnes of oxygen to Sri Lanka to help the island nation in crisis and battle the third wave of the COVID-19. Currently, India has not extended monetary help to Sri Lanka due to its economy. However, the High Commissioner of India has said that India is committed to partner with Sri Lanka in its economic recovery amidst the crisis.

The crisis in Sri Lanka needs attention from both Indian and International media as this could not be seen as a point of concern in the media. The inflow of media from Sri Lanka is controlled by the entrepreneurs who publish mainly after securing their interests. Also, there are regulations made by the government after the emergency has been imposed. The crisis needs attention firstly to help Sri Lanka recover from this and secondly to show how the country is suffering due to the lack of a phenomenological approach in the decisions taken by the government.

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