Sri Lanka is a warning against irrational government policy 

Source: The post is based on an article “Sri Lanka is a warning against irrational government policy” published in the Live Mint on 29^th July 2022.

Syllabus: GS 2 Indian Economy and issues relating to planning, Mobilization of Resources, Growth, Development, and Employment.

Relevance: Government Policies for economic growth, and other measures

News: Sri Lanka is suffering the world’s worst economic crisis since World War II.

The citizens in Sri Lanka stand in queue for food and pharmaceuticals. There is a shortage of fuel for vehicles and big power outages. The situation is so dire that millions of people have taken to the streets.

The former president has fled the country and parliament has elected a new government.

Causes Behind Sri Lanka crisis

Now, Sri Lanka cannot obtain essential inputs to restart its economy until it has restructured its debt and installed a working government. The restructuring of debt will be complicated because a significant portion is owed to China, which does not participate in the multilateral Western-led restructuring exercises for overindebted sovereign borrowers.

Lessons for Sri Lanka and other debt-distressed nations

Policymakers in other economically struggling countries should take heed of the Sri Lanka crisis.

Sri Lanka should have approached the IMF late in 2021 (or even earlier).  The implemented reforms could have controlled inflation and reduced its current-account and fiscal deficits, and further, at least six months of suffering could have been avoided.

The country’s economic authorities should not pursue desperate and economically irrational measures. The authorities should implement serious reforms in the economic sector.

The G-20 has rolled out a Debt Service Suspension Initiative that extended some $13 billion of relief to 48 countries in 2020-21. However, more such measures are needed for heavily indebted developing countries.

Lessons from Brazil: The country quickly adopted the necessary policy reforms, following its 2002 debt crisis. Thereafter, it has enjoyed years of sustained growth