It is a tale of what happens when you keep slicing taxes and giving freebies to impress your voters, when you wish to modernize everything in a day, ignoring your lack of resources, and when your foreign debt surpasses your GDP. Yes, it is the tale of the worst economic crisis Sri Lanka has faced since its independence in 1948.
Recently, when our Central Government reduced taxes on Petrol and Diesel, almost everyone rejoiced it, and you might have seen FEBS' post too about that, but what impact shall we expect on our economy? Also, in our country, some state governments always remain in the limelight for giving freebies to the public. How adverse can that be for our economy?
Be with me till the end of this article, and you will realize why it all happened and what lessons India needs to learn from the journey of this century's first Sovereign Default nation in the Asia-Pacific region.
When your whole nation runs out of petrol and power cuts of around 15 hours become a daily affair, you can imagine the hardship being faced by the Sri Lankan population. When a country cannot print even newspapers and conduct school examinations because of an acute shortage of paper, and routine surgeries and several laboratory tests need to be suspended because of a lack of medicines, the nation is indeed in turmoil. Food prices have soared around 46% year on year, and Inflation is hitting 30 per cent in a country which is bound for repayment of US$8.6 billion in 2022 itself, while foreign exchange reserves stand at US$1.9 billion, as per the report of Bloomberg.
It all started a few years back when the then Government took some populist decisions like halving the VAT and increasing tax-free thresholds, which led to a 33% decline in registered taxpayers.
Subsequently, their Central Bank started printing money in massive amounts to meet the spending. On a lighter note, if they wouldn't have printed so many notes, they might still publish newspapers and school answer sheets. Despite regular warnings from the IMF and other international economic agencies, the Government reduced taxes and printed more money in the greed of cheap publicity but never did they know how costly it would be for their ordinary people.
You might have seen the Media propagating a narrative that Sri Lankan Crisis is a gift from China, but if you analyze it as an economist, only 10% of their foreign debt is Chinese. Not that I am endorsing China or its debt trap scheme by any means, but facts remain facts, and China is not the culprit, at least in this case.
Another primary reason behind the collapse of the Sri Lankan Economy is the decision of their Government to ban inorganic fertilizers completely and allow only organic farming. Again, I am not against Organic Farming, and I don't wish to hurt any of my nature lover readers. Still, this decision is equivalent to banning petrol run automobiles and allowing only Electrical Vehicles or banning old currency notes and promoting digital currency and transparency.
Okay, that sounds familiar:)
If you are still not convinced that this decision of the Sri Lankan government was detrimental, you would be shocked to know that Sri Lanka, which used to be self-sufficient in Rice Production, had to start importing rice because of a 20% decline in production within the first six months of this order. Also, the loss in Tea Production amounted to $425 million.
As George Gilder said, "In embracing change, entrepreneurs ensure social and economic stability." In the blind race to become the world's first Organic Farming Nation, Sri Lanka thrashed its Agriculture sector, where over 30% of its citizens are employed.
I don't wish to write a very long article, so I won't comment much on the impact of the Pandemic and the Russia-Ukraine War, which are pretty evident throughout the world.
Coming to the way ahead, India has already extended new lines of credit, and similar support is expected from some other nations and the IMF. UN is also pushing the world for the need for a humanitarian approach to deal with the crisis. Still, ultimately, it is the country's internal policies that will decide the fate of 2.2 crores of common Sri Lankans living on that Island. Let's see what the new Prime Minister, who has also taken the additional responsibility of running the Finance Ministry, has in his mind and how he handles the situation.
I bid adieu; drop comments below if you wish to convey anything to me.
Have a nice day ahead!
For the freebies thing. Freebies are not good for our economy.
Like in india subsidy work like this- if u are billed with 500 rupees then you have to pay the company like 250 and the rest 250 is being paid by the government directly to the company..
Instead of this the government and company should collaborate and find which class or group of people really need this..and government should pay the money directly to the citizens not to the company..
Eg- if i am billed with 500 then i have to pay 500 to the company and government and company identify me that i am bpl or apl and act accordingly.
So this will make equal Justice to the…
Actually decreasing the VAT is good thing (that's not included in freebies) But such reduction requires proper planning. When VAT is decreased so people have extra money to spend and hence the liquidity or frequency of cash flow increases. But in the case of srilankan disaster the Gota government decreased the VAT but the timing is wrong.. The covid pandemic outbreak is there in the country. Despite being having cash in the hands of public the cash inflow got decreased severely and this decision take a backstep for the economy..