1. Sri Lanka’s Economic Revival: Crisis to Recovery

Introduction

Sri Lanka’s economic recovery from a severe crisis serves as a real-world example of financial mismanagement, policy failures, and international intervention. This case study explores the root causes, impact on citizens, and the government’s strategic measures to stabilize the economy.

Causes of the Economic Crisis

Sri Lanka’s economic downturn was triggered by multiple factors, leading to one of the worst financial crises in its history.

1. Excessive Debt Accumulation

• The country borrowed heavily for large-scale infrastructure projects, such as the Hambantota Port and Colombo Port City.
• By 2022, the debt-to-GDP ratio exceeded 100%, making repayment impossible.
• A significant portion of the debt was owed to foreign creditors, including China, India, and the International Monetary Fund (IMF).

Sri Lanka’s External Debt Composition (2022)

2. Foreign Exchange Crisis:

• Sri Lanka’s foreign exchange reserves fell from $7.6 billion in 2019 to below $50 million in 2022.
• A heavy dependence on imports for essential goods such as fuel, medicine, and food worsened the crisis.
• The government was unable to service external debt, forcing it to default in April 2022, the first time in its history.

3. COVID-19 Impact:

• Tourism, which contributed nearly 12% of GDP, collapsed due to global travel restrictions.
• Over 3 million jobs in the tourism sector were directly or indirectly affected.
• Annual tourism revenue fell from $4.3 billion in 2018 to just $1.1 billion in 2021.

Sri Lanka’s Tourism Revenue (2018-2022)

4. Tax Cuts & Inflation:

• In 2019, the government slashed VAT from 15% to 8%, significantly reducing tax revenue.
• Inflation soared, reaching 73% in September 2022, making basic goods unaffordable.

Graph 1: Decline in Sri Lanka’s Foreign Reserves (2019-2022)

(Data Source: Sri Lanka Central Bank)

📊 Graph Representation: A sharp decline from $7.6 billion in 2019 to nearly $0 in 2022

Impact of the Crisis

• Currency Devaluation: The Sri Lankan Rupee depreciated by over 80% against the US Dollar, making imports expensive.
• Energy Shortages: Fuel and electricity crises led to daily power cuts of 12+ hours in mid-2022.
• Unemployment Spike: Businesses closed, increasing the unemployment rate to 9.2%.
• Political Instability: Widespread protests forced President Gotabaya Rajapaksa to resign.

The crisis severely affected daily life in Sri Lanka:

• Food shortages: Prices of essentials like rice, sugar, and milk powder increased by over 100%.
• Fuel scarcity: Long queues for petrol and diesel led to public unrest.
• Job losses: Thousands lost jobs as businesses shut down or reduced operations.
• Healthcare crisis: A shortage of medicines and medical equipment led to increased mortality rates.

Graph 2: Sri Lankan Rupee Depreciation (2019-2023)

(Data Source: Sri Lanka Forex Exchange)

📊 Graph Representation: A steep decline in rupee value, crossing Rs. 350/USD in 2022

Strategies for Economic Revival

To recover, Sri Lanka implemented major economic reforms:

1. IMF Bailout & Debt Restructuring
   • A $2.9 billion IMF loan was secured in March 2023.
   • Debt restructuring negotiations with China, Japan, and India.
2. Tax & Fiscal Reforms
   • VAT was increased from 8% to 15% to boost revenue.
   • Government spending was cut by 20%.
3. Currency Stabilization & Inflation Control
   • The Central Bank raised interest rates to over 30% to curb inflation.
4. Boosting Exports & Foreign Investment
   • Incentives for agriculture, IT, and manufacturing.
   • Encouraging foreign remittances by relaxing banking rules.

Graph 3: Sri Lanka’s Inflation Rate (2021-2024)

(Data Source: IMF Economic Reports)

📊 Graph Representation: A peak of 73% in 2022, followed by a gradual decline to 6.3% in 2024

Economic Recovery Progress As of 2024:

✅ Inflation reduced from 73% to 6.3%.
✅ GDP Growth projected at 3.2% in 2025.
✅ Tourism Rebound, contributing $4 billion in 2024.
✅ Foreign Reserves increased to $3.5 billion by Q1 2024.

Lessons Learned

📌 Sustainable Debt Management: Over-reliance on debt without repayment capacity can collapse an economy.
📌 Economic Diversification: Tourism-dependent economies must develop multiple revenue streams.
📌 Fiscal Responsibility: Tax reductions without revenue replacement can be disastrous.
📌 Monetary Policy Importance: A weak currency fuels inflation and import crises.

Conclusion

Sri Lanka’s economic crisis was a lesson in mismanagement, but its recovery showcases strategic fiscal discipline and global cooperation. While challenges remain, the revival efforts provide a strong case study on economic resilience.

Sources

1️⃣ IMF Reports: (www.imf.org)
2️⃣ World Bank Data: (www.worldbank.org)
3️⃣ Sri Lanka Central Bank Reports: (www.cbsl.gov.lk)
4️⃣ Reuters Analysis: (www.reuters.com)