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Sri Lanka’s economic crisis: Where we are and can we get out of it?

The 2019 presidential elections in Sri Lanka were held on the 16th of November 2019.The election was hard fought and many promises were made by the respective campaigns. Gotabhaya Rajapaksa emerged as victorious and with the subsequent appointment of Mahinda Rajapaksa as Prime Minister, it was clear that the Rajapaksas were back in charge.

A lot has changed since the date of the election, however. The President’s popularity is at rock bottom. A central issue driving his downfall and deterioration is the state of the Sri Lankan economy. Sri Lanka has historically struggled with structural weaknesses in its national economic. The editorial will analyse three areas pertaining to the current Sri Lankan economic crisis and make a final concluding remark on the overall state of the Sri Lankan economy.

1. Macro and microeconomic indicators:

There are four key indicators relating to the country’s current economic crisis. The first is the exchange rate. At present 1 US Dollar stands at 287.71 Sri Lankan Rupees. 1 British Pound equals 379.99 Sri Lankan Rupees. These figures are indicative of an extremely weak exchange rate which is not competitive internationally and which is indicative of internal structural weaknesses in the economy.

The second indicator is the Sri Lankan passport. The passport of a country, which is the document its citizens use to travel abroad, is a key indicator of a country’s economic position and economic prosperity. Countries such as the United States and the United Kingdom or even India have very strong passports with visa free access to several countries. As of 30 May 2019, Sri Lankan citizens had visa-free or visa-on-arrival access to 43 countries and territories, ranking the Sri Lankan passport 96th in the world in terms of travel freedom tied with the DR Congo and the Kosovan Passports. Successive Sri Lankan governments have failed or been unable to correct or to improve the standing of the Sri Lankan passport which has overall contributed to migration difficulties and reduced the mobility and the economic status of all Sri Lankans.

The third indicator is unemployment, in particular, youth unemployment. An analysis of the nature and type of unemployment in Sri Lanka reveals that Sri Lanka has a significant youth unemployment problem. Past authors have viewed unemployment as particularly high among the more educated, but once we control for age and sector, the positive relation between education and unemployment disappears for urban youth and is significantly weakened for rural youth. Moreover, even the relation among rural youth is brought into doubt when we account for unemployment duration. Typical unemployment spells last four years or more and is not related to education. Controlling for age, more educated youths in Sri Lanka have higher unemployment rates because they left school more recently.

The fourth indicator is international debt which has been accumulated over the years by taking out bilateral and commercial loans. A total of $7.3 billion needs to be serviced this year or the country faces the situation of defaulting on its debt. The latter loans are taken at higher interest rates and short repayment periods, and contribute in large part to the current economic crisis.

2. The economic crisis viewed from a governance perspective

The net lens through which the current economic crisis can be analyse is that it is a failure of governance. The President has not been able to assemble a team of skilled economic advisers who can advise him on a national economic policy that can stimulate the economy, create jobs, and reverse the current trajectory of the economy. There is also an increasingly popular perception that this government and its leadership lacks the technical skills to lead and manage the economy. Good economics is good politics and this government has failed to use active fiscal and monetary policy, to manipulate the interest rates and to raise the money supply in the economy in a way that will create employment and activate a stagnating economic system. This situation is extremely concerning and analysts all around the world are talking about an economic crash for Sri Lanka. Almost all major ratings agencies around the world have downgraded Sri Lanka. 

3. The emotional effect of the crisis

This article is about economics and economics is about people. And guess what? People are creatures of emotion, not reason. People have hopes and dreams, aspirations and ambitions for their families and their children. The current economic crisis has created among all Sri Lankans who live in the country a feeling of despair and hopelessness, a feeling of inertia, that nothing good is going to come out of this and there is no light at the end of the tunnel. This has contributed to mental and emotional health issues and a grim mood among the ordinary people of the country. The bulk of this country is struggling to stay afloat financially, particularly in the rural south and north outside of the commercial capital of Colombo. Even when you walk or drive through the streets of Colombo it is very rare not to encounter a beggar begging for some cash to feed themselves. Now these elements and instances may not be quantifiable, but they reflect the emotional mood of the people of the country which is one of desperation, anxiety, fear and despair.

In conclusion, the future for Sri Lanka and the Sri Lankan economy looks very bleak indeed. The political equilibrium is weak and is unlikely to improve any time soon. The financial situation of the people of this country is bleak and Sri Lanka faces an internal financial crisis coupled with an external debt crisis. But there is a crucial lesson to be learnt from all of this and that this that you need to manage the economy properly and to govern your country well. Poor governance coupled with economic mismanagement cannot be corrected at the last minute through international help and assistance. This is the lesson that Sri Lanka is currently learning. But does this leave much hope for the people and the country? This remains to be seen.