Learnings From Sri Lanka
Introduction: The world is aware of the crisis Sri lanka has been drowning into. The global recession, the repercussions of the Russia Ukraine war and the Covid-19 pandemic has only exacerbated the issue. Sri Lanka has not only been in a political turmoil but with that, also in economic and social turmoil.
All the arenas, it has been facing issues , are interconnected. Sri Lanka has been a beautiful tourist destination and a center of attention from across the world over the years. It has been a middle income country but lately because of the economic mismanagement it has collapsed.
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VAT & PAYE:
A significant part of the Sri Lankan GDP has its source from the tourism industry. But because of the pandemic the tourism industry has been hit very badly which has led to a decline in the country’s GDP. With that the government had also reduced and changed the taxation structure of the economy. The Government of Sri Lanka under Rajapaksa had reduced VAT to 8 per cent. With this it also reduced corporate tax from 28 per cent to 24 per cent, and abolished the Pay As You Earn (PAYE) tax and the 2 per cent “nation-building tax” which financed infrastructure development. These so-called reforms led to a 33.5 per cent decline in registered taxpayers.
Decline in Forex Reserves:
The worst part of the situation was that the country’s Forex reserves declined abysmally. The country had to pay a huge amount of debt which it could not finance through its declining reserves. The country’s foreign debt increased from nearly 42 percent of GDP in 2019 to 119 percent of GDP in 2021. The depreciation of the Sri Lankan Rupee because of printing of more and more currency is also one of the factors that led to the crisis.
Increase in Imports of Agricultural Products:
The economic failure of this country is not the result of a single action but a series of events and actions that the government took. One of the most important reasons is also the increase in imports of agricultural products, especially rice, because of the failure of agriculture in the country, as a result of the government banning chemical farming and emphasizing on organic farming. Organic farming could not keep up with the demand and needs of the population of Sri Lanka. Even though organic farming was abandoned in Sri Lanka yet the damage was already done.
Many other Global factors result in increase in the cost prices because of production of commodities getting difficult, as a result inflation rose and electricity, food and fuels became very expensive This made services come at a standstill. Even the students faced a lot of hardships, because of not being able to attend schools and take examinations.The disappointment and distress that all these situations created for the common man of Sri Lanka led to the agitation and political destabilization of the government. The angry protesters agitated and raided the government institutions. The result of which was remarkable. Sri Lankan President Gotabaya Rajapaksa resigned.
Avoid Unchecked Borrowings:
This crisis can teach a lot of lessons to India, to avoid any similar crisis in the near future. We all know that because of the impact of the pandemic and recession as a result of the Ukraine -Russia war, all the countries are under distress and the global order is also under threat. India can gain insights from the situation of Sri Lanka and avoid any hardship. The unchecked borrowing by the Sri Lankan Government, even more than its GDP, was the prime reason for the problem. India should check its debt to GDP ratio and make sure that the ratio is safe and healthy.
Tax restructuring should be done cautiously as reduction and taxes was also one of the most significant reasons for the failure of the government in Sri Lanka. Managing the inflation, yield on government borrowings, maintaining liquidity in the market and keeping an eye on the benchmark rates to support the growth, stable exchange regime etc. are important tasks from a central bank’s perspective.
Importance of Self Sufficiency:
Geopolitical tensions are the perfect example to teach us not to be dependent on important sources from other countries. The importance of self sufficiency is well understood. India’s coal reserves are reducing and most of the energy production in India is through coal. Hence, alternate measures should be kept ready. Lastly, self-sustainability is the key for developing nations. Some of the previously announced initiatives like PLI for the manufacturing sector, national Monetisation Pipeline has the potential to push growth and the government should stick to these. Giving impetus to the manufacturing sector and fiscal stimulus to the economy is an important method to maintain a sound economy. Along with these regulations in policy interventions are equally important. Capacity utilization should be focused upon.
Domestic Stabilization Policies:
Sound fiscal position with low inflation and large Forex Reserves are fundamental for a healthy economy. Populist measures of government should be checked upon freebies in India are a matter of concern and should be controlled. The Sri Lankan situation teaches the importance of not only the need for well-timed and well structured domestic stabilization policies but also the benefits of international cooperation and good relations with countries in support of strong and sustained global growth and financial stability. Sound macroeconomic framework and macroeconomic prudence indeed creates room for stabilization policies to safeguard fiscal sustainability and capital flow management measures to better manage systemic risks.
So far it is clear, how the Sri Lankan government fails to take timely measures which resulted in the crisis and also led to various forms of struggles and hardships for the common people of Sri Lanka even though India is asserted its friendship with Sri Lanka by cooperating yet such situations take time to go back to normalcy. However situations like these also become a lesson to be taken by other countries and to be cautious in their approach of managing the economy of nations because in the world that is globalised today, actions of one country impact the other countries. Hence all nations should be prudent and careful while making actions and taking policy decisions.