[Answered] What led to the economic crisis in Sri Lanka? Highlight the lessons that can be taken from this crisis.  

The Sri Lankan economic crisis is an ongoing crisis in the island-state of Sri Lanka that started in 2019. It is the country’s worst economic crisis since its independence in 1948. It has led to unprecedented levels of inflation, near-depletion of foreign exchange reserve, shortages of medical supplies, and an increase in prices of basic commodities.

Reasons behind the economic crisis in Sri Lanka

• Twin deficit: Sri Lanka is facing a budget shortfall alongside a current account deficit. The country’s national expenditure exceeds its national income. Capital-intensive projects (e.g., Hambantota port) did not deliver the expected returns.
• BOP crisis led to the devaluation of Sri Lankan currency hitting payments for essential items and debt servicing.
• Decline in foreign exchange reserve:It gave rise to high uncertainty among people regarding the nation’s economic stability in the coming time.
• Spiralling debt: Sri Lanka has borrowed repeatedly since 2007 leading to $11.8 billion worth of piled-up debt which makes up 36.4% of its external debt.
• Difficulty in getting international credit:Many rating agencies downgraded Sri Lanka’s sovereign ratings to the junk category citing rising repayment pressures and “uneven access” to financing as reasons.
• Decline of Tourism Industry: due to Easter bombings in 2019 and the Covid pandemic.
• The spike in oil prices on an economy totally dependent on imported oil has also affected the economy.

Lessons that can be taken from this crisis

• Most oil-importing emerging countries need to worry about their ability to fund increasing import bills constantly.
• It would be best to raise domestic tax revenue and shrink government expenditure to limit borrowing, particularly sovereign borrowing from external sources.
• There is a need for ambitious fiscal consolidation based on high-quality revenue measures, raising income tax.
• The country’s heavy dependence on imports for essential goods should be reduced like sugar, pharmaceuticals, fuel, pulses and cereals worsened the crisis.

Economic crisis in Sri Lanka is a reminder to other countries to constantly introspect their economic policies at regular intervals. It provides a lesson to every nation regarding the adverse consequences that can arise due to ill-timed and irrational policy decisions.