Sri Lanka is facing an exorbitant economic crisis, the foreign currency reserve of the country has lowered below $1 bn. Inflation has touched the tourism reliant country in all spheres from fuels to basic amenities. International debt has increased and people are left unemployed, life has come to a tumultuous halt.
Organised protests are taking shape in the geographical landscape, demanding a motion of no-confidence against the ruling government, the government which has repeatedly failed them.
Why Is There an Economic Crisis?
Sri Lanka is undergoing a twin deficit economy, there’s a shortfall in both the current account deficit and budget.
As the 2019 Asian Development Bank working paper states, “Twin deficits signal that a country’s national expenditure exceeds its national income, and that its production of tradable goods and services is inadequate.”
Mismanagement by the government has repeatedly put the country under economic crisis. Today, there is a 30% increase in food prices. The farm sector was deeply impacted when the ban was imposed on the usage of chemical fertilisers. Rice production lowered.
Deep tax cuts were implemented before the Coronavirus pandemic by the Rajapaksa government is one of the major reasons for the plummeting economy. Debt management programmes collapsed and foreign exchange reserves had minimal value, a loss of 70 % in the last two years.
Despite the warning factors the Central Bank of Sri Lanka and the Rajapaksa government did not seek help from the IMF. When due to the Ukraine-Russia war, the oil prices escalated in April they approached the IMF.
Here are a few solutions:
International Alliance And Regulation Of Loans
Already the Rajapaksa government is taking assistance from China and India. Essential commodities including medicine and food are imported to Sri Lanka from India on a $ 1 billion credit line. Another $ 1 billion is being given to Sri Lanka.
Meanwhile, China has provided CBSL with a $ 1.3 billion syndicated loan and a $ 1.5 billion swap. There is a need for more nations to come and take charge of the humanitarian and economic crisis.
But there is an acute need for the CBSL to monitor the loan transactions and carry out stress testing to record errors. The CBSL should have more autonomy to regulate finance. Because if again the demand for cash flow increases, the market economy will have less supply which will further cause inflation.
The Sri Lankan government is using temporary export surrender requirements which means the distribution of forex acquired by exporters through local currency.
Currency Board Regime
Under currency board regimes it is seen there is a lower fiscal deficit or surplus in a larger range. The overt borrowing has caused Sri Lanka to be in a high budget deficit, the currency board will impose regulations that will regulate the monetary financing of government expenditures, and put a prohibition on the direct transaction if it is not budget-friendly.
Also Read: In Pics: Visuals From The Streets, As Sri Lankans Demand Resignation Of The Rajapaksa Government
IMF Advisories
The then Agriculture Secretary, Udith Jayasinghe told the reporters before the dismissal from the government in December about the urgent need to secure monetary aid from the IMF. He said,
“We may need to borrow crops from friendly nations, such as maize, and consider rationing food to ensure pregnant women and those with illnesses are fed. Others may be required to make concessions.”
The IMF has given plausible solutions- diversification of the market, removal of import transactions, encouragement of investment, and liberalization of exports. It focused on the protection of vulnerable groups and the improvement of revenue generation and collection.
They gave a formal statement, “In addition to creating fiscal space for higher social safety net spending, the coverage, targeting, and per-family benefit need to be strengthened to provide adequate protection for vulnerable groups.”
It further added, “Fiscal consolidation should be primarily revenue-based, given Sri Lanka’s very low tax-to-GDP ratio. The needed revenue should be mobilized from CIT, PIT, and VAT, by raising rates, minimizing exemptions, and ensuring greater contributions from high-income earners.”
Political Resistance-New Government
The public is protesting on the streets, demanding the Rajapaksa government step down. The government runs on blood connections, the government which is leading the entire country into deprivation, destitution, and devastation.
The Rajapaksa government has approached for negotiations but the public is adamant about their proposal, the trust in the current government has broken as day by day they have become unemployed. They have no roof over their heads and basic goods are overpriced or stocked out.
The political resistance counter-narratives the voice of the people, their democratic voice for the appointment of new leaders is paramount.
Do you think the no-confidence motion against the government will provide an alternative solution?
Disclaimer: This article is fact-checked
Image Credits: Google Photos
Source: Aljazeera, The Indian Express & moneycontrol
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This post is tagged under: Currency swaps, debts, destruction, economic emergency, Financial, food prices, foreign exchange, Gotabaya Rajapaksa, government, humanitarian, India, inflation, loans, Meltdown, Necessities, pandemic, poverty, president, repayments, Reserve, revenue, Sri Lanka, state, strongman, tax, world bank, World Travel and Tourism Council, Solutions, India, China, IMF, Advisories, Deficit Economy, Fiscal deficit, Inflation. Political resistance, Sri Lanka, Economy, Currency Regime, Banking
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