Sri Lanka: A Note on Crisis

The COVID-19 pandemic has affected the global economy but the degree of impact varies based on the number of cases, action plan by the authorities, GDP contributing factors and agility in the implementation of policies.

Sri Lanka has a 22 Mn population out of which 65% of the population lies in the age bracket of 15-65 with 34 years as median age, as per the United Nations report of FY2020. The GDP has seen an
incremental pace from FY2000 to FY2019 as $19.37 Bn to $84 Bn, respectively. The similar trend has been followed with respect to GDP per capita in current prices from FY2000 to FY2019 as $1,031 to $3,851, respectively. Contrary to this, the country has seen a downward trend in the real GDP as compared to the previous year.

The share of economic sectors is dominated by the service sector at 59.67% of the GDP which
employs 47.15% of the working population in the country followed by Industry and agriculture at
27.87% and 24.98% respectively, as per the World Bank report in the FY2020. If we closely look at
the unemployment rate in the country, it is at a rising rate since FY2012 from 3.88% to current rate
of 8.35% out of which 20.79% contribution comes from the youth, which creates a sense of dilemma amidst COVID-19.

India and China are the major import partners for Sri Lanka contributing 24% and 23% respectively. Additionally, Sri Lanka has stably exported approximately $11 Bn worth goods since FY2014 which took a downward turn in the FY2020 at $10 Bn, and it is to be noted that United States is the major export partner for Sri Lanka at 24%. As per IMF reporting. the national debt for Sri Lanka from the FY2016 to FY2021 is increasing at a CAGR of 9.39% (12.82% including the projections until FY2023). Further, the external debt reported as $49.2 Bn in the FY2020 which accounts for 62% of the GDP and the internal debt was reported as $25.5Bn leading to total public debt as $74.7 Bn.

Note: the national debt in relation to the GDP of the country stands at 108% approximately in

The country has seen an unstable inflation rate evident by the fact that in FY2014, the reported
inflation rate was 2.8% which increased to 6.6% in the FY2017; and currently the country hit 11.1%
rate in November y-o-y, and authorities warned worsening economic crisis could prompt further
food rationing.

Undoubtedly, the country got impacted due to COVID-19 pandemic, and the tourism sector brought down the reserves, but the ban on fertilizers, pesticides and herbicides to encourage organic farming in the country turned out to be critical for food supplies and prices of essentials. This brings to the theory of a philosopher and economist; Thomas Malthus in the 18th century, which states that food production will not be able to keep up with growth in the human population, since population increases in a geometric progression while food production increased in arithmetic progression.Therefore, banning fertilizers overnight could be one of the reasons for inflation and crisis.

Soon after the ban, the country started seeing the empty shelves at government-run supermarkets due to the fact that the productivity of organic fertilizers is less than the chemical fertilizers and the supply side of the essential goods got hit, since 90% of the farmers relied upon the chemical fertilizers.

The national debt and food crisis brought down the foreign reserve of the country which stands at $2.8 Bn in July 2021 as compared to $7.5 Bn in November 2019.

With the sharp increase in the debt and the amount of money to purchase the foreign exchange
necessary to import goods; is drying up the foreign reserves, and it is said that the money is diverted towards debt settlement. It is to be noted that country is heavily dependent on imports to meet even the essential food supplies leading to hoarding practises and inflation in the country. The government has blamed the speculators for causing the rise in the prices of essentials and declared economic crisis under the Public Security Ordinance wherein the army has been deployed with the duty of seizing food supplies from the traders and supply to the consumers at fair price.

The central bank has appealed for foreign currency and may seek foreign aid to help feed the
neediest. Recent visit to India, Sri Lanka sought a $500 Mn credit line to pay for its crude oil
purchases due to severe foreign exchange crisis. Further, recently Fitch downgraded the IDR rating for Sri Lanka from ‘CCC’ to ‘CC’ due to an increased probability of a default event in coming months in light of Sri Lanka’s worsening external liquidity position.