Sri Lankan Economic crisis 2022: In the content, we are going to understand the Sri Lankan economic crisis. As you may have heard from the news, Sri Lanka is facing its worst financial crisis since its independence in 1048. This country is currently running short of foreign exchange reserves because of which they are unable to import essential commodities like food, fuel, and medicines. Sri Lanka is also running short of papers because of which the country has canceled all their exams and that has apparently affected millions of students. And then it is also said that the Sri Lankan government has approached the International Monetary Fund for a bailout.
Bailout basically means asking for financial assistance in order to save any business or in this case you can say save the country’s economy from collapsing. And you also need to ponder upon the fact that the Sri Lankan government is asking for this kind of financial assistance on differing loan repayment. A differing payment basically means an agreement between the lender and borrower where the borrower requests the lender to give them a loan and that loan will be repaid at a later date when the situation would be comparatively better. So this pretty much explains how much the Sri Lankan economy is on the verge of collapsing. Now, India has granted $1 billion to the Sri Lankan government as credit so that the country can use that money to buy essential commodities.
Sri Lanka economic crisis
And since this money is given in the form of credit, which means Sri Lanka has to repay this money to India in the future when the situation becomes comparatively better. As of now, Sri Lanka has a huge pile of public debt which is basically 110% of its GDP and the inflation rate is at 15%, which is the highest inflation rate since 2008. Pakistan and Sri Lanka are both currently in a similar situation. I have made a video on Pakistan’s current situation. If you want to watch that, you can find the link to that video in the top right corner.
Currently, 277 Sri Lankan rupee is equal to $1, the Pakistani rupee is at 180 and the Indian rupee is at 76. That means if a particular country’s currency depreciates with respect to the dollar, then it will increase the cost of imports. Depreciation means weaker. For example, $1 used to be Rs 70, but now it is equal to 76 Indian rupees. That means the Indian rupee has depreciated.
SriLankan Economic crisis 2022
It has become weaker compared to the US dollar. If at all India wants to import anything, then India has to pay more Indian currency to acquire goods. Similarly, the Sri Lankan rupee is 277. That means if Sri Lanka wants to import something, they will have to end up paying a lot of Sri Lankan rupees. That means import becomes expensive and that will have a trickle-down effect on Sri Lanka’s domestic market.
And always remember, whenever any countries import-dependent, meaning they import more than what they export, it can destroy the country’s balance of trade. So always remember maintaining the appropriate balance of imports and exports is crucial for any country. If you look at the formula of finding out GDP, GDP is equal to C plus I plus G plus bracket, X minus M, C is consumer spending, I is an investment, G is government spending and X is export, M is imported. In this equation, the Export minus import will give you net export. When the export is more than the import, Then the net export figure is going to be positive and this actually means that a country isn’t trade surplus.
Similarly, when exports are less than imports or imports are more than exports, Then the net export figure will be negative and that means the country has a trade deficit. A healthy economy has to find the right balance between its exports and imports. It is always recommended that the trade deficit of a country should be below. Having a trade surplus is ideal. Not every country can achieve that.
The current economic situation in Sri Lanka 2022
But if at all, the country achieves it, that means the country has plenty of resources to support its economic activities and at the same time, it can also export. Since in this video we are talking about Sri Lanka, their public debt is around 110% of their GDP. They are in a situation wherein they have no other option but to borrow money from countries and international financial organizations like IMF, World Bank, Asian Development Bank, etc. Because right now Sri Lanka needs money to keep its economy from collapsing. And on the other hand, even if they manage to get the money, they will not be able to pay it back anytime soon.
So if you look at the current situation, it is like this. Even if Sri Lanka acquires funds, they will show short default meaning they will not be in a position to repay the loan anytime soon. But they will need that loan money to keep their economy running. Now try to understand this in the personal sense. Are you willing to lend money to someone about whom you are sure that they will not be able to return your money anytime soon?
Sri Lanka’s economic crisis explained
Will you still lend money? That is the same question Sri Lanka is facing anyhow. India has given $1 billion credit for purchasing immediate goods like food, fuel, medicines, etc. E. And India is also fine with the time limit of the repayment.
But then, if you see $1 billion is not enough for Sri Lanka, The Sri Lankan policymakers have to find a way out of this tight spot. It is going to be as bad as biting a bullet. So as of now, the Sri Lankan government has two options. The country needs to either restructure its debt or go to the international monetary fund for a relief package. As I’ve mentioned, Sri Lanka’s Finance Minister has approached the IMF. And if you remember in January.
Sri Lanka was not in favor of approaching the IMF. Rather, it approached China for another loan to address its economic crisis. Now here’s an important question. Why did Sri Lanka think that it’s better to go to China for a loan rather than go to the IMF? Let me tell you something about IMF.
You have to understand that if you want a loan from the IMF, they have certain conditions. As you may know, IMF is controlled by Western countries and part of those conditions include as a country you will have to keep collateral in order to get a loan which is normal. If you need a loan, you will have to keep something as collateral. But here is an interesting condition of the IMF. They also interfere in the government’s functioning in the name of assistance.
Why SriLankan Economic crisis 2022
Imf indirectly maintains leverage by giving orders to borrowing governments to correct their macroeconomic Imbalances in the form of policy reform. If I have to put it in simple words, suppose you take a loan from the IMF. The IMF has certain conditions. If you fulfill it only, then you get the loan. So part of those conditions also includes that IMF will give you orders and directions for changing your economic policies in the name of reform.
Meaning they will not only give you loan money, but they will also tell you how to use that money more of like interference. That is why many countries are reluctant in approaching the IMF for any kind of financial assistance. They rather look for a country that can lend without interfering. But then for Sri Lanka, it is desperate times that call for desperate measures. That is why they have approached the IMF.
However, you also have to understand that IMF has many conditions before giving any loan, and looking at Sri Lanka’s current situation, IMF also has to keep in mind the risk of defaulting. Anyone who lends money will also do the assessment of whether so and so personal organization or a country can return the money on time. Otherwise, it will eventually add up to the existing debt. Apart from IMF, Sri Lanka also needs to restructure their debt. So restructuring of debt means let me explain it to you with an example.
Suppose you have debt in four different areas of your life, so naturally, you are going to experience financial distress and liquidity problems. Now what you will do is you are going to plan out a way through which you can get someone to refinance you on your existing debt. This means you will ask for more loans to repay the main loan. Now what you will do is you’re going to plan out a way through which you can get someone to refinance you on your existing debt, meaning you will ask for more loans to repay the main loan. Obviously, you also have to pay some interest on the new loan.
Or maybe you also need to keep something collateral that is not of any immediate use to you and you would not mind recovering it later. Or sometimes you also have to sell assets to get that money, whatever it is. The main thing is you have to pay interest on any amount you borrow. Usually, that interest amount should be lower than the interest that you pay on your existing main debt. The idea is to accumulate smaller debt to manage the load of overall larger debt.
This is called debt restructuring. Of course, it also includes other things. For example, finding a suitable compassionate lender who can understand your problems and lend you money and would not mind waiting until you come to a stable position. So all of this also matters. So it’s quite a task.
Current Economic Situation
It’s not that easy. So even Sri Lanka has to do something like this. Only then they will be able to keep the economy running while it looks all easier theoretically. But if you see on the ground people of Sri Lanka are angry and frustrated. Opposition leaders are also using this as an opportunity to create more panic.
But then as of now, you can see through the news that people are protesting against the government. They are demanding President Go Tabaya Rajapaksa resign. Now the main question is how did Sri Lanka end up in this economic crisis? The actual crisis started at the end of 2019. But then if you see Sri Lanka’s foreign debt started rising in 2010.
You can see in this graph that after 2010 there was a sharp rise in Sri Lanka’s external debt and if you go further deep you will notice that Sri Lanka owes most of its debt money to countries like China, Japan, and even India, but comparatively lesser other than countries. Sri Lanka also owes a lot of money to World Bank Asian Development Bank. The Sri Lankan government has also borrowed a lot of money from the international market which comes under the category of market borrowing. Usually, any government borrows money from the market to meet its expenditure. It is widely believed that Sri Lanka fell into this kind of economic crisis due to the short-sightedness of the current politicians.
Since 2005 till day there have been only three presidents. The first one is Mahinda Rajapaksa, then Mathripala Sirisena and the current President go to Baya Rajapaksa. And if you look at all the political parties of Sri Lanka, you will realize that they are either socialist or Democratic parties. Hence there is a huge interference from the government in almost every aspect of the country’s business. You have to understand that socialism and the Democratic parties are all brainchildren of communism.[ 1]
I’m not saying they are the same. Obviously, there have to be some subtle differences, otherwise, everyone will know their Bluff. But they are brainchildren of communism. If you go into the history of each and every President of senior influential political leaders of Sri Lanka, you will notice that back in the 50s and 60s they were directly or indirectly part of the Communist party. And Furthermore, you will find a lot of trade Union.