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What is the actual situation in Sri Lanka?
The island country is facing an economic crisis in the present which has not been experienced in the past days, the inflation rate has hit the percentage of 17.5% in the prices of food items making the people in all classes making them to the stage of purchasing the most essential goods such as 500 Sri Lankan Rupees for per kilogram of rice which was before 80 Sri Lankan Rupee.
The increase in import of rice from other countries for about $450 Million was caused due to the decrease in the production of rice in the home country, which decreased the contribution of the agricultural sector to the government.
This decrease in the agriculture sector is also caused due to the implementation of a special act by the president using only organic methods of agriculture which created a loss of $425 million.
The people have shifted to electronic applications such as electric cookers, and electric stoves due to the increase in the fuel and cooking gas consumption and cost.
The tourism sector is considered one of the incoming earning sectors for the Sri Lankan government but due to the pandemic and inflation, this sector has drastically reduced by about 18% showing a single step forward and double the step backwards.
The examinations for school students were postponed to the later days due to the shortage of ink and imported papers, there may also be expected the cancellation of certain unimportant exams in order to meet up the shortages.
Why did this collapse happen?
The government of Sri Lanka under Gotabaya Rajapaksa as the president reduced the tax rates in accordance with the promise made in the election time. This decreased the corporate tax from 24% to 28%, abolition of pay as you earn tax, reducing the VAT to 8%. These proposals were opposed by the finance minister but then these were implemented by the Sri Lankan Government. It made the government print money of 119.08 million on 6th April 2022 taking the country to the present inflation point and pushing towards bankruptcy of the country as a whole.
On 3rd April 2022, a sudden crisis was raised from the political side of the country creating a resignation from all 26 members of the second Rajapaksa cabinet with the exception of Prime Minister Rajapaksa in an overnight meeting performing an act against the constitutional protocol. Gotabaya makes a temporary cabinet with 4 members on 3rd April 2022 to manage this unforeseen situation.
On 9th May 2022, Prime Minister Mahinda Rajapaksa resigned from his position and was replaced by Ranil Wickremesinghe on 12th May 2022 by president Gotabaya Rajapaksa. These many changes in the political framework affected a huge disturbance from the public side causing lots of protests against the government.
The government on one side faced political crises and on the other side there increased the debt percentage of the government. The foreign exchange reserve was reduced below $50 billion due to the ban of chemical fertilisers in the year 2021, causing a foreign debt of about $7 billion this year. The country is expected to pay off the debt of US$ 4 billion to its external debtors but as of now, it has a reserve of only US$ 2.3 billion causing a shortage of $1.3 billion. The Sri Lankan government has a debt from different sources such as market borrowings, Asian Development Bank, World Bank, and the International Monetary fund since the year 2019 which is also expected to be paid in the upcoming years but the country has a deficit reserve.
Will it create an impact in India?
In March 2022, sixteen Sri Lankan Tamil refugees landed in the coastal region of Tamil Nadu, predictions are made that there is an increase in the number of refugees arriving in the coastal region. In order to help the neighbouring island, India has increased the credit line to about $500 billion.
There is a benefit for the Indian government due to the extended inflation in Sri Lanka, as it is well known that this island country produces a peculiar orthdox tea in their region. But this
inflation hike made the Sri Lankan importers purchase in the Indian market causing an increase of 41% in tea sales in Kolkata auctions when compared to the previous years. The fuel shortage drastically reduced the exports of apparel from the country, the apparelexport industry contributes to about 44% of the total export of the country is now reducing drastically. As a result, the traders from the EU, UK and Latin American countries are switching to companies in Tirupur, the textile hub of Tamil Nadu, accelerating the growth of the Indian economy.
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