The Fallout of Once-rich Lankan Economy A Comparative Analysis -Ahmad Bhuiyan


The South Asian island nation is facing the worst economic downturn in memory since its independence in 1948. At one time, Sri Lanka was the best in the region in terms of social indices. It was ahead of everyone in education. The garment sector was the first to enter South Asia in Sri Lanka. Sri Lanka was also a favorite destination of tourists. But the civil war did not allow the country to move forward. Due to lack of security, the garment industry moved to Bangladesh in the 80’s. The number of tourists also decreased in the meantime.

The country is heading towards hyper-inflation. Foreign exchange reserves have declined alarmingly. Daylong blackouts across the country & the empty fuel stations are perfect epitome of country’s dwindling economy. Acute food & energy shortages sparked widespread outrage among the mass public, which turned into anti-government protests too.

After the end of the Civil War in 2006, Sri Lanka’s gross domestic product (GDP) continued to grow until 2012. At that time, the per capita income increased from US$ 1,436 to US$ 3,619, which was the highest in South Asia. The country also became an upper middle income country in 2019. But could not hold any achievement. As its growth slowed, the World Bank dropped them to low-middle-income countries the following year. After that due to the decline in exports, there was huge imbalance in the current income. Sri Lanka’s export products are mainly three, readymade garments, tea and rubber. Revenue from all three products has been declining, but the biggest downturn has been in the last two years, during the Epidemic. After all, they are in even greater crisis because of the Russia-Ukraine war.

The two events of 2019 are particularly significant for today’s fall of Sri Lanka. A bomb blast near the northern city of Colombo has killed at least 253 people and injured dozens more. Then the tourism industry, which contributes to GDP of its 10 percent, collapsed abruptly, posing serious pressure on foreign exchange reserves. The second incident happened by President Gotabaya Rajapaksa himself. As a popular measure, the VAT rate was reduced from 15 per cent to 8 per cent all of a sudden. At the same time, he abolished the system of Nation Building Tax & ‘Pay as you earn’. This measures had negative impact on revenue. Within just one year, the country’s VAT collection reduced by 50 percent.

After the infection of Covid-19 started, in last two years, expatriate income, tourism, exports — everything went downhill. In Covid, the governments of all the countries of the world have increased the cost, they have had to give incentives to the economy. Likewise, Sri Lanka has also had to increase its budget expenditure. But the income was low. As a result, the budget deficit increased to 10 percent. Usually, it is considered as a danger signal,If it is more than 5 percent.

Inflationary pressures mounted when the central bank started printing money. Inflation in Sri Lanka is now 16.7% as per the government and 30.1% in food products. However, as of a private sector measure, inflation is more than 55 percent. In this situation, the country’s trade deficit now stands at more than 1 billion.

Debt Trap:

Sri Lanka’s debt is now 119 percent of GDP. In other words, the country owes more than the goods and services it produces in one year. 36.4% of Sri Lanka’s debt is in international sovereign bonds. According to the International Monetary Fund (IMF), a total of 500 million will be repaid to Sri Lanka this year as debt repayment. But now Sri Lanka has only 231 million worth of foreign exchange reserves. So it is a far cry to repay the loan, as they have to take new loan to run their economy.

It is said that Sri Lanka is trapped in the debt trap of China. Although there are pros & cons, a large number of infrastructure projects have been implemented with loans from China. For example, for the construction of the deep-sea port of Hambantota, it borrowed 307 million from China on a 15-year commercial basis at an interest rate of 7.3 percent. But the income from this seaport was very meager that was not enough to repay the loan. As a result, another 656 million was taken from China for management. Alas! That didn’t work either. The port was later leased to China for 99 years.

Another ‘White Elephant’ project, borrowed from China, is Mattala Rajapaksa International Airport. The cost of this airport is more than the income. Fewer passengers, fewer aircraft takeoffs. Hence, this airport is now called, the emptiest international airport in the world.

In the current crisis, Sri Lanka has asked for a new loan of 2.5 billion from China. India is also lending 1 billion. However, it is unlikely that any other country or entity will give new loans to Sri Lanka. The country’s debt has fallen because it has not been able to repay its previous debts. Bangladesh last year lent 200 million from foreign exchange reserves. They could not pay the money on time.

In January, Sri Lanka’s central bank governor Ajit Nevard Cabral said he did not want to go to the IMF at all. He also commented that the company does not have any magic wand to solve the problem. But in the end, they had to go to the IMF. The crisis is so deep that they have officially asked for a loan from the IMF.

Bangladesh Perspective:

The situation in Sri Lanka doesn’t seem relevant to Bangladesh that much. But the recent trend of adopting very expensive & glamorous projects in the country has led to fears that Bangladesh, like Sri Lanka, may fall into the ‘debt trap’ in the future. At a recent international conference in Munich, Indian Foreign Minister Jayashankar called on Bangladesh to rethink such unnecessary projects.

However, there are also questions about the profitability of many large projects in our country. Inflationary pressures are rising. Expatriate income is also declining. On the one hand, as the import expenditure is setting new records, the current account deficit is also setting new records. Experts are advising Bangladesh to be careful in this situation.

We also need to take steps to reduce unnecessary expenditure, taking lesson from Sri Lanka’s crisis. In Bangladesh, there are a number of government-run projects with foreign loans. There are questions about the need for all of this.

Moreover, the huge amount of money spent on the ongoing project for construction of railway line from Dohazari to Cox’s Bazar via Ramu seems unreasonable. Although, Padma bridge construction is very pragmatic, the building of railway line on it at a higher cost is not reasonable. The reality is that more people walk on the roads in our country. Most of the goods are transported by road.

By the fiscal year 2020-21, the total debt of the Government of Bangladesh was 42.5% of GDP, but of this, 16.5% of GDP was foreign debt of 72.43 billion. In the budget of 2021-22 financial year, with the government’s tax-to-GDP ratio falling below 9 per cent, huge allocation for debt repayment is a red signal. At the same time, it should be noted that the economy of Bangladesh is highly dependent on garment exports and remittances. If these two sectors collapse, our economy will also be in crisis.

Inadequacy of physical infrastructure is a major obstacle to the economic development of Bangladesh, so the construction of infrastructure must be accelerated. But it would not be too late for Bangladesh to fall into the trap of indebtedness like Sri Lanka if instead of taking the necessary projects, the fascination of glamorous and unnecessary projects are given priority.

The writer is independent analyst on the issues of business and economy.