The world at large including African nations must consider how Sri Lanka found itself in such a dire situation as it deals with its biggest economic crisis ever since it attained independence in 1948.
Sri Lanka, which was formerly lauded as a success story in the developing world for providing for the nation’s low-income basic needs as early as the late 1970s is currently witnessing its biggest economic and financial crisis The World Economic Forum (WEF) once termed Sri Lanka as South Asia’s richest economy. Sri Lanka's economy is in a state of collapse due to the crisis. Food, medication, and other necessities like fuel are under-supplied. Over the past few months, food prices have skyrocketed by more than 40%. Further, 70% of households reported having reduced food consumption, frequently switching from three meals a day to two. High oil prices have led to power cuts as long as 13 hours a day. President Gotabaya Rajapaksa submitted his resignation stating that he served the country to the best of his ability and will continue to do so in the future. The president however blamed the pandemic and its countermeasures such as lockdowns for Sri Lanka’s economic woes, adding that he took the best steps, including trying to form an all-party government to counter the economic meltdown.
There are four aspects to the nation’s current economic crisis.
The first is tax cuts. With minimal regard for the potential for significant budget deficits, Sri Lanka included comprehensive tax cuts in the 2019 election announcements. In order to fulfill this electoral promise, the government implemented significant tax cuts toward the end of 2019 and in the early months of 2020 before the pandemic. Sri Lanka Cabinet slashed the value-added tax (VAT) to 8% from 15% and also abolished seven other taxes. Due to the drastic tax cuts, Sri Lanka's credit rating was downgraded the next year, alienating it from the global financial markets. This also resulted in the loss of around one million taxpayers between 2020 and 2022, posing a significant challenge to an economy that was already struggling with pervasive tax evasion. According to estimates, government revenue -to GDP fell to 8.7% in 2021 from 9.1% in 2020, and tax revenue- to -GDP fell to 7.7% as well.
The second is the foreign exchange crisis which resulted in the depletion of Sri Lanka's foreign reserves due to the Covid-19 pandemic, travel restrictions, as well as significant concerns regarding consumer confidence and the status of the economy. This led to a massive reduction in imports of essential items and shortages of essential goods like fuel, cooking gas, medicine, and food. Worker’s remittance which previously stood at $ 600 million per month dropped to $318 million in June. Further remittance to the nation’s main foreign exchange earner dropped from $2.8 billion in the first six months of 2021 to $1.3billion in the same period in 2022 reflecting a decline of 53%. The third is the country's debt crisis. The government of Sri Lanka is essentially unable to pay back the substantial loans it has obtained from its developmental partners, including, but not limited to, China as well as from international markets. Sri Lanka suspended the repayment of about $ 7 billion in foreign loans due in 2022 out of $ 25 billion to be repaid by 2026. The country’s total debt stands at $ 51 billion.
The fourth aspect is the agricultural reforms. President Gotabaya Rajapaksa, laid out a 10-year plan agenda in the National Policy Framework termed Vistas of Prosperity and Splendour for Sri Lanka to shift to entirely organic farming following his win in the 2019 presidential election. The overall goal of the National Policy Framework was to establish a people-centric economy with productive citizens. It sought to integrate urban and rural populations and bring about high-value additions in agro-industries and quality services, in pursuit of a new national spatial system. To lessen the negative health effects of using chemical fertilizers and pesticides in farming and to support environmentally friendly, sustainable agricultural systems, the Sri Lankan government decided to outrightly ban agrochemicals import in April 2021. The use of chemical fertilizers in industrial farming was incongruent with the sustainable food systems of Sri Lankan heritage. Additionally, this was a precaution against Sri Lanka's fast declining foreign exchange reserves due to numerous imports at the time. The outcome was fast and severe. Over two million farmers, or about 27 percent of the working population in the country, were left in need of organic fertilizers. The government did not subsidize the purchase of organic fertilizers and herbicides by farmers or encourage domestic manufacture of these products. Crop yields were ruined by the abrupt policy change. Average yields of rice, a staple food in Sri Lanka, that produces in excess and exports, were reduced by almost 30% forcing the country to import rice. Further, tea production, one of the country’s prime exports fell by 18% reducing its foreign exchange earnings.
The cause for the massive anti-government protests in Sri Lanka is a lack of trust and accountability in the president and his administration as a result of poor decisions they made that destroyed the country's economy. Amnesty International in its latest report, from Bad to Worse: Rights under Attack During Sri Lanka’s Economic Crisis calls for the need for the Sri Lankan government to protect the human rights of everyone and ensure an enabling environment for peacefully expressing dissent. Sri Lanka sends a clear message about what can happen to nations that are already chronically mismanaged. Many African nations could suffer the same fate as the post-pandemic recovery and the Russia-Ukraine war has sparked global food shortages and a surge in prices. Oil prices have increased amid the Russia-Ukraine war, which is another reason for the indebtedness. Due to the war, exports have been severely restricted, which has caused food prices in developing nations including Africa to increase. Poorer countries have been affected by fuel inflation, which has increased their foreign debt. Heavy foreign borrowing, populist tax measures, and erroneous agricultural policies have all made Sri Lanka unable to withstand the pandemic's economic effects. These are important lessons that African nations need to borrow.
The Sri Lankan economy will take time to revive, and austerity will continue to be a prominent theme for the foreseeable future. Therefore, as part of the solution, Sri Lanka requires a strong industrial policy that can create employment, diversify export output, and boost the local economy and this applies to all African nations. Taxation is a key source of government revenue; the economy has experienced quite a setback because of the concessions afforded in the past hence the need for an appropriate tax policy regime. Strict measures are required to be implemented by the government to curb tax evasion and corruption. The country also needs to take steps to stabilize the economy by strengthening public finance. The island country needs to place utmost significance on credit diversification and the restructuring of its foreign debt in the future. Lastly, Sri Lanka needs to restructure the government as well, where others including opposition leaders are also made part of the decision-making process.
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