By TON Research Section 

Sri Lanka’s GDP per capita is one of the largest among South Asian countries but despite that Sri Lanka is facing worst economic downturn in 73 years. The economy of Sri Lanka was in trouble before the start of Corona virus pandemic however, Sri Lanka is trying to sustain economic growth but the government’s high debt payment remained a concern and has contributed to the debt crisis. Sri Lanka’s economy was already in trouble since South Asian island nation’s civil war ended in 2009 and after that in 2019, the Easter bombings hit hard Sri Lanka’s tourism sector in which 250 people were killed. Tourism sector was one of the important sources of foreign exchange earnings which amount for about 5% of GDP earning and provide jobs to 3 million of Sri Lanka’s population. As if what happened was not enough, lockdowns during the corona virus pandemic had further damaged the already struggling growth and economy of the country.

However, there is no doubt that Sri Lanka has made significant progress after the military defeated Tamil rebels in 2009 albeit, today the Sri Lanka’s economy is again having worst downturn in the years. The growing national deficit and rising dept has put the currency under pressure. The local currency fell to record low and can be rescued only by a $660 million loan from China.

The head of the economic research group Point Pedro Institute of Development, Muttukrishna Sarvananthan said that “The condition of the economy is in dire straits; there is no doubt about it.”

The central Bank of Sri Lanka declared at the end of 2020 that the country’s economy had contracted by 3.6 per cent and has recording the heavy recession since 1948. Moreover, Sri Lanka is also struggling with revenue collection and earlier, government funds and economy both were dwindling. Moreover, Foreign Direct Investment (FDI) inflows remained low and the government was not successful in reaching the target which caused drop in Sri Lanka’s foreign reserves. And now the foreign exchange reserves had run dry to a level that are barely enough to pay for imports of last three months at a time when big repayments of its foreign debts are falling due, that is further damaging its financial system. International rating agencies have also showed their concern over the ability of Sri Lanka to service its huge foreign debt as the country’s foreign reserves fell sharply in 2020. The government has limited U.S. dollar transactions. So far Sri Lanka paid $1.3 billion debt and in this year, Sri Lanka requires totaling $3.7 billion to make debt payments. Central Bank of Sri Lanka says that its currency is weakening against other major currencies making the payments more costly.

Although, Sri Lanka’s foreign debt troubles are not new and have more often led to balance of payment (BOP) issues, which is much more than its huge borrowing from many other foreign sources. In spite of the limits imposed, imports still surpass the country’s exports. From the last four decades; Sri Lanka has been relying heavily on loans from foreign countries for development, which results in a large foreign debt stock. Sri Lanka’s government obtained several rounds of loans for construction and development from China and most of the loan repayments have not been started yet. Sri Lanka is also been seen as a country that has fell into debt trap of China due to the many projects that are financed by China but now debt problem of the Sri Lanka goes beyond China.

According to the central bank, Sri Lanka obtained a $1.5 billion swap facility from China earlier this year and $400 million swap from India will be available by August to help rebuild its reserves. Now, Sri Lanka is in need of sufficient foreign currency inflow for the repayments of foreign debt which is only possible through increased exports, FDI or more external debt albeit, Sri Lanka failed to fulfill any of these to equal its growing foreign debt repayment obligations. So far, Sri Lanka’s government has not been able to eliminate the fear of economic downturn. The main reason behind the ongoing economic crisis is the structural weaknesses like low tax revenue, reduction in trade and others. Failure of the Sri Lanka’s government to provide long-term inclusive and consistent solutions to deal with all the structural weaknesses has resulted in the economic crisis in the country and now concrete steps are needed to overcome the economic crisis in the country.