Introduction
In the serene landscapes of Sri Lanka, where vibrant cultures and breathtaking scenery once painted a portrait of prosperity and tranquility, an impending economic crisis has cast a shadow over the island nation. In recent years, Sri Lanka has become entwined in a complex web of economic challenges that transcend mere statistical indicators and fiscal policies. This crisis, characterized by a perfect storm of inflationary pressures, escalating external debt, and a plummeting currency, has evolved into an all-encompassing force, placing an undeniable burden on the lives of its resilient citizens.
The narrative of Sri Lanka’s economic downturn is one defined by complexity, shaped by a convergence of domestic and global factors. As the nation grapples with the consequences of mismanagement, fiscal imbalances, and the reverberations of a world in flux, the impact has permeated the very fabric of society. From bustling urban centers to serene rural landscapes, the economic strain is palpable, affecting the aspirations and daily existence of individuals from all walks of life.
At the core of this unfolding saga is the specter of inflation—an insidious force that erodes the purchasing power of the Sri Lankan rupee, leaving families struggling to afford even the most basic necessities. The cost of living, once a manageable aspect of daily life, has spiraled out of control, triggering a domino effect that pervades every facet of society. As prices soar, the burden is disproportionately felt by those already on the fringes, exacerbating existing inequalities and widening the gap between economic classes.
Intensifying this predicament is the precarious state of Sri Lanka’s external debt, a burden that has surged to unprecedented levels. The nation finds itself entangled in a debt trap, delicately maneuvering the balance between meeting its obligations and addressing the urgent needs of its citizens. The implications of this financial quagmire extend well beyond the economic domain, infiltrating the social and political spheres, breeding uncertainty about the nation’s future.
Amid the economic tumult, the resilient and united Sri Lankan people grapple with the formidable challenge of adapting to a new normal. Dreams of upward mobility, once propelled by a flourishing economy, now clash with the harsh reality of stagnation. The job market, strained by economic contraction, leaves many contending with unemployment or underemployment, exacerbating the prevailing sense of despair.
This introspective exploration seeks to peel back the layers of Sri Lanka’s economic crisis, delving into the intricate interplay of factors that have brought the nation to this critical juncture. From the bustling markets of Colombo to the tranquil villages in the central highlands, emerging stories depict a nation at a crossroads, grappling with the profound burden of an economic crisis that transcends mere statistics—a crisis that has woven its tendrils into the very tapestry of people’s lives.
Once hailed for its abundant resources, Sri Lanka’s current predicament stems from deficiencies in proper handling and management, resulting in a myriad of problems today. Ongoing political instability has significantly impacted the development status of various sectors, exacerbating economic crises. Social insecurity, intensified by Sri Lanka’s economic downturn compounded by Covid-19 and an unstable government, has taken a toll on people’s livelihoods. The lack of a viable solution to the economic crisis has heightened issues, especially with decreasing employment and rising living costs, making meeting basic needs such as food, education, and medicine a burdensome challenge. The consequence is an alarming increase in people being driven into debt.
The nation’s economic turmoil is further exacerbated by a decline in income, particularly from the tourism sector affected by the Covid-19 pandemic. The devaluation of the Sri Lankan currency has led to increased inflation, driven by rising food prices. The ban on the sale of chemical fertilizers and pesticides has compounded the economic crisis. Most recently, a massive economic downturn has unfolded due to the escalating burden of national debt, with the depletion of foreign exchange reserves standing out as the primary catalyst behind the country’s economic woes.
Irrespective of their status in Sri Lanka, individuals across the spectrum are earnestly working to create opportunities that enhance their livelihoods. Whether civil servants or wage laborers, everyone dedicates their days to grappling with the escalating cost of daily living. The economic burden has become a formidable challenge, persistently impacting various aspects of life, including education, health, industry, labor wages, and sustainable development. In Sri Lanka, the economic crisis is progressively imposing a heavy toll on the populace, influenced by an array of contributing factors.
Foreign Exchange Deficit
A prominent factor contributing to the economic crisis in Sri Lanka is the acute shortage of foreign exchange, posing significant challenges in meeting the country’s import obligations. Essential commodities such as fuel and medicine are increasingly difficult to obtain, escalating costs, and burdening ordinary Sri Lankans.
The gravity of the foreign exchange crisis is underscored by the central bank’s efforts to stabilize the exchange rate. The resultant recession has led to a surge in unemployment rates, heightening financial insecurity among the populace. With dwindling job opportunities, social issues are exacerbated, and the uncertainty surrounding livelihoods has created hardships for individuals and families alike.
Impact on the Cost of Living
The economic crisis has significantly affected the cost of living for ordinary Sri Lankans. Rising inflation rates are eroding the purchasing power of the local currency, resulting in higher prices for basic necessities. The escalation in the cost of goods and services has trapped families in financial difficulties, adversely impacting their overall quality of life.
Moreover, job opportunities are decreasing, while the cost of living is on the rise. Amidst these challenges, fulfilling basic needs such as food, education, and medicine has become a burden. The extent to which people are driven into debt has increased exponentially. In this scenario, the current social security schemes of the government provide only a meager amount of money that falls short of meeting the essential needs of the people. There is confusion among the population about how to allocate limited funds for necessities like food, education, and medicine in the high-inflation environment. A recent examination conducted under the Aswesuma scheme proposed by the IMF and the World Bank revealed that many needy individuals, including existing beneficiaries, were not included in the schemes.
Concerning livelihood assistance, there have been sporadic government grants and partial donations from corporations. However, these programs were discontinuous and provided only partial assistance in building sustainable livelihoods. In an attempt to establish sufficient means of living, people found themselves ensnared by microfinance loans. The peak of the repercussions became evident in 2016-2017. Consequently, issues like debt burdens, suicides, seeking employment abroad, and stress have become prevalent.
Government Actions and Changes
In response to the prevailing economic crisis, the Sri Lankan government has initiated a series of policy and economic reforms. Structural adjustments have been implemented to tackle budget imbalances, and negotiations for financial assistance have been conducted with international financial institutions such as the IMF, resulting in secured loans. The primary objectives of these measures are to stabilize the economy and lay the groundwork for long-term recovery. However, it is essential to note that these actions have imposed additional burdens on the populace.
Beyond the evident economic impacts, the crisis has also engendered social and political consequences. Public dissatisfaction with the government’s handling of the issue has given rise to protests and demonstrations. The convergence of political unrest and economic challenges creates a delicate situation that requires careful navigation to maintain stability. Adherence to specific conditions imposed by international organizations is mandatory for the disbursement of loans. Consequently, the persisting effects of the new tax policy, price increases, and economic burdens continue to affect the lives of the people.
The tax burden and price increases are affecting the daily lives of people
The escalating tax burden and rising prices are significantly disrupting the daily lives of the Sri Lankan population. The government’s decision to raise tax rates comes amid substantial economic setbacks for the country. According to the Prime Minister’s Office, the Value Added Tax (VAT) has surged to 12%, effective from the beginning of this month. The office asserts that the intention is to collect 91 billion rupees through the value-added tax in 2022; however, this figure will now increase to 156 billion rupees due to the new tax adjustments.
Several key acts, including the Inland Revenue Act, Value Added Tax Act, Telecommunication Tax Act, Betting and Sports Tax Act, Financial Management Act, Personal Income Tax Act, and International Income Tax, will undergo amendments. As Vijayachandran (2022) notes, “This tax increase, imposed in accordance with the conditions of the International Monetary Fund, will deprive the people of Sri Lanka.” In this context, the government has created a situation where daily wage earners and grassroots individuals working in plantations are significantly affected.
Commodity prices are expected to rise by 60-70 percent once again. Economists predict that people will face a massive economic crisis starting from January. Traders are imposing taxes on the goods, which consumers resist. Consequently, the prices of goods will increase further. The government is placing this burden on the people in order to secure the IMF loan. Beyond the tax increase, if the IMF loan is obtained, the responsibility of repaying the loan will fall on the people. This situation is likely to push Sri Lanka into a continuing spiral of debt and income deficit.
Some strategies to address an economic crisis include
Addressing an economic crisis requires a comprehensive set of strategies aimed at stabilizing the economy, restoring investor confidence, and fostering sustainable growth. Here are some key strategies often employed to mitigate the impact of an economic crisis:
- Fiscal Reforms:
- Implementing responsible fiscal policies, which involve prudent budget management and the reduction of budget deficits, helps restore financial stability.
- Introducing measures to increase government revenue through fair and effective taxation can contribute to fiscal consolidation.
- Monetary Policy Adjustments:
- Central banks can use monetary policy tools, such as adjusting interest rates, to influence money supply and control inflation.
- Implementing measures to stabilize the exchange rate can enhance economic stability and boost investor confidence.
- Debt Management:
- Developing a sustainable debt management strategy is crucial. This may involve restructuring existing debt, negotiating favorable terms with creditors, and avoiding excessive borrowing.
- Structural Reforms:
- Implementing structural reforms in key sectors, such as labor markets, education, and healthcare, can enhance productivity and competitiveness.
- Encouraging innovation and entrepreneurship fosters economic diversification and resilience.
- International Assistance:
- Seeking assistance from international financial institutions, like the International Monetary Fund (IMF), can provide financial support and policy guidance.
- Collaborating with other countries for trade agreements and foreign direct investment can bolster economic stability.
- Promotion of Key Sectors:
- Focusing on and investing in key sectors like tourism, agriculture, or technology can stimulate economic activity and job creation.
- Implementing targeted incentives and support programs for struggling industries can aid in their recovery.
- Social Safety Nets:
- Establishing or strengthening social safety nets helps protect vulnerable populations during times of economic hardship.
- Ensuring access to basic necessities such as food, healthcare, and education for those most affected by the crisis is essential.
- Encouraging Foreign Investment:
- Creating a conducive environment for foreign direct investment (FDI) attracts capital, technology, and expertise from abroad, stimulating economic growth.
- Offering incentives and streamlining bureaucratic processes can enhance the attractiveness of the country to foreign investors.
- Labor Market Policies:
- Implementing policies that support employment, such as job training programs and wage subsidies, can mitigate the impact of unemployment during an economic downturn.
- Flexibility in labor markets can facilitate adjustments to changing economic conditions.
- Public-Private Partnerships (PPPs):
- Collaborating with the private sector through PPPs can facilitate infrastructure development and contribute to economic growth.
- Leveraging private sector expertise and resources can complement government initiatives.
- Communication and Transparency:
- Maintaining open communication and transparency about government actions, economic policies, and the overall economic situation helps build trust among citizens and investors.
- Clear communication reduces uncertainty and fosters a more predictable economic environment.
- Environmental and Social Sustainability:
- Integrating environmental and social considerations into economic recovery plans ensures long-term sustainability.
- Balancing economic development with environmental conservation and social equity is crucial for resilience.
These strategies, when tailored to the specific context of a country facing an economic crisis, can form a robust framework for recovery and pave the way for sustained economic growth.
Sri Lanka continues to maintain close relations with many countries at the international level. Given the current situation in Sri Lanka, numerous international organizations and countries have expressed interest in providing aid. However, this assistance has led to a substantial debt burden for the people in the future. Therefore, the government should formulate effective plans for the judicious utilization of domestic resources. Specifically, sectors such as tourism, tea, and rubber production should be promoted, and alternative solutions suggested by economic experts need to be considered. Additionally, proper development projects should be implemented.
Sri Lanka is actively engaged in negotiations with international organizations. While some companies have devised plans to encourage investment in Sri Lanka, the government should implement measures to ensure that such initiatives do not unduly burden the populace. Specifically, the loan programs received from China have turned China into a partner in various development projects in Sri Lanka, imposing a burden on the people. Additionally, the investment projects led by certain Indian businessmen in Sri Lanka have resulted in both positive and negative consequences for the local population. In light of these developments, it is imperative to implement programs that address proper employment opportunities, fair wages commensurate with the nature of work, the reduction of tax burdens, establishment of economic development programs, and the judicious utilization of domestic resources with the involvement of domestic intellectuals.
To foster and ensure political stability, it is imperative to expedite the process of requesting assistance from the International Monetary Fund (IMF). In particular, economic development can be achieved by simultaneously adjusting monetary policy, manipulating exchange rates, and implementing fiscal policies to stabilize the exchange rate.
Furthermore, the current foreign exchange reserve crisis has been exacerbated by spending on imports surpassing incomes. Consequently, the government should take appropriate measures to reduce import costs. Efforts need to be intensified to bolster Sri Lanka’s tourism sector. When confidence is established within the business community, foreign direct investors, and foreign donors, and when attractive activities are implemented, they contribute significantly to solving many issues. The government should embark on fiscal reforms to ensure the sustainability of debt. Measures that can boost domestic tax revenue in a developmental manner should be implemented, with a focus on increasing taxes.
Conclusion
In conclusion, Sri Lanka grapples with a profound economic crisis intricately woven into the lives of its resilient people. Driven by inflation, soaring external debt, and a depreciating currency, the crisis touches every aspect of society, widening inequalities and deepening the gap between economic classes.
The nation faces a delicate balance, navigating the complexities of servicing debt while meeting citizens’ needs. This struggle extends beyond economics, fostering uncertainty in social and political spheres. As the job market contracts, dreams of upward mobility clash with the reality of stagnation, intensifying the sense of despair.
From bustling markets to serene villages, the crisis paints a poignant portrait of a nation entangled in economic woes. A foreign exchange deficit adds to the struggle, impacting essential imports and driving up costs. Families grapple with financial hardships, trapped in debt as social security falls short.
Government actions, while attempting to address the crisis, impose additional burdens. Policy reforms and negotiations spark public dissatisfaction, leading to protests. Tax increases, conditions for loans, strain daily lives, necessitating a delicate balance between international assistance and effective domestic strategies.
Promoting key sectors, fiscal reforms, and judicious resource utilization are vital. Encouraging investment without burdening the populace, ensuring fair wages, and involving domestic intellectuals are critical components. Expedited IMF assistance, stabilized exchange rates, and efforts to reduce import costs contribute to a path of recovery.
Despite formidable challenges, strategic actions can guide Sri Lanka toward recovery. Addressing root causes, promoting sustainable development, and prioritizing well-being are crucial as the nation strives for economic stability and prosperity.
Therefore, Sri Lanka’s economic crisis is causing unprecedented challenges among the population. Livelihoods have been severely impacted, and the burdens of debt and taxes have significantly disrupted daily life, fostering apprehension about the future. The savings habits of the people are declining, and the common scenario involves decreasing income and increasing expenditures. From the upper class to grassroots levels, individuals face economic challenges on a daily basis.
The country’s economic crisis is attributed to several factors, including a decrease in foreign exchange, a decline in exports and imports, improper utilization of domestic resources, an inability to restore the economy with well-considered plans during crises, an unstable government system, and instances of corruption and scams. These factors have profoundly affected the public, imposing substantial economic burdens. However, the implementation of sound economic policy procedures, debt restructuring, and taxation schemes can alleviate the burden on the people. These measures are crucial for the sustainable development of Sri Lanka in the future.
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Author –
S. Arulnesan
[S. Arulnesan is an individual with a keen interest in writing, creativity, and research. He earned his Bachelor of Education Honors with Second Upper Division from Eastern University of Sri Lanka and holds a Master of Education degree from the Open University of Sri Lanka. Simultaneously, he is pursuing a Master’s Degree in International Relations at the South Asian University of India. His academic achievements are complemented by a diverse range of diploma degrees in fields such as media, human rights, human resource management, Sinhala, psychology, information technology, and democracy for human rights. Beyond academia, S. Arulnesan has actively contributed to writing articles in areas spanning Politics, Society, Education, and General Issues, which have been published in newspapers and magazines. His passion for writing garnered recognition when he received the National Literature Award of Sri Lanka in 2019. Engaging in a multitude of activities, he has demonstrated a commitment to social, educational, and political research work]
Source – South South Research Initiative
