Decoding Why Sri Lanka is Facing its Worst Economic Crisis

Lately, the Sri Lankan economy has been facing its worst-ever crisis with huge piles of foreign debts, soaring inflation, a series of lockdowns, inflation in foreign currency and much more. Showing an extremely lower than expected growth rate of 1.8 per cent in the last quarter of the 2021 financial year, and 3.7 per cent in the entire year, the country had also sought financial help from various countries and the international monetary fund (IMF). Entrepreneurship courses in India and other courses have helped Indian students to learn the tactics for tackling such situations and helping the economy survive. 

The Reasons That Led To Sri Lanka’s Downfall

There are various reasons that are responsible for Sri Lanka’s severe downfall, here they are:

  • The downfall of the informal sector

The Sri Lankan economy was facing a severe crisis even before the pandemic hit. The Covid-19 pandemic further added to its downfall by adversely impacting the informal sector. The informal sector in Sri Lanka accounted for nearly 60 per cent of employment and income generation. Therefore, its defeat led to reduced income and cash flow in the economy. 

  • Fall in foreign exchange reserves

The country’s foreign exchange reserves have fallen by up to 70 per cent in the past two years to $2.31 billion. This has left the country struggling to pay for even essential imports like food and fuel. Tourism, one of the key sources of foreign currency in the country was also badly affected by the covid pandemic leaving the traders in an even more severe position. Along with this, the number of Sri Lankans working overseas also declined, adding to the foreign currency losses. 

  • Job losses and shortages

There has been an enormous number of job losses in the country. On an average, one person in every household was reported to lose his/her job. This has led to an increase in poverty. According to the World Bank, the share of people below the poverty line based on the average income of $3.20 had increased by 11.7 per cent in the year 2020. For more than 5 million families in this category, the Sri Lankan government had provided an allowance of Rs. 5000. This only helped briefly because the latest Ukraine-Russia conflict led to a hike in the prices of fuel and gave another hit to the already struggling economy of Sri Lanka. 

  • Increasing inflation

In March of 2020, there was a ban imposed in Sri Lanka on imports to save the foreign currency required to serve its foreign debts of $51 billion. This resulted in an immense strike in prices and a shortage of essential goods. People are forced to opt for cheaper food items to cut down expenses, pity things like a cup of tea have also become extremely expensive. In Sri Lanka, doctor’s visits have become a far dream for people compelling them to go for self-medication. 

This economic crisis in Sri Lanka has been shocking and eye-opening for the entire world. Various lessons can be taken from this crisis related to economic management, trade and more which have been adopted and now are being taught by various top B-schools in India and International MBA colleges.

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