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How is Sri Lanka economically bankrupt?

South Asian island country Sri Lanka is going through an extreme economic crisis. Since independence in 1948, Sri Lanka has never been in such a dire situation. One of the main reasons is that the country is burdened with foreign debt.


The situation is so dire that Sri Lanka does not even have foreign currency to import daily necessities. That's why the price of goods in the country has skyrocketed. Due to the severe shortage of fuel, thousands of people are crowding in line to collect oil. Army has been deployed in Sri Lanka's petrol pumps to handle the situation. There is no money to import paper. So school exams have also been cancelled. Sri Lanka has undertaken several mega projects in the last fifteen years. Among these are seaports, airports, road construction and other types of projects. Domestic and foreign experts say most of these projects are unnecessary. Sri Lanka has taken huge loans from various sources to implement these projects. Although money was spent on loans, many projects were not economically profitable. All those projects have brought the greatest danger to Sri Lanka. It includes Hambandota seaport and airport.


A new airport has been built at Hambandota but it is practically unused. Because the airlines do not want to go there. Another ambitious project is Colombo port city. Colombo port city project to build a modern city by creating an artificial land in the middle of the sea. They had plans to beat Dubai, Singapore and Hong Kong with this city. Sri Lanka is implementing this project in joint venture with China. Its budget is about one and a half billion dollars. And the work will take twenty-five years to complete. But it remains to be seen where Sri Lanka's economy will stand by then. Already there is only wailing going on across Sri Lanka. Sri Lanka's economic problems did not develop overnight. Over the past fifteen years this problem has accumulated. The various governments of Sri Lanka have continuously taken loans from various domestic and foreign sources. For the past fifteen years there has been little foreign direct investment in Sri Lanka. Instead of foreign investment, the government has been focusing on borrowing for various tenures. In the last decade, Sri Lanka has borrowed five billion dollars from China. With this loan, Sri Lanka has built various infrastructures. In this case, China's debt alone cannot be blamed. Borrowing from China is easy. So Sri Lanka borrowed huge money from China. Only ten percent of Sri Lanka's total debt is taken from China.


Apart from this, Sri Lanka has taken many loans from the Asian Development Bank, Japan and various international currency markets. One of the sources is sovereign bonds. Since 2007, the country's government has issued sovereign bonds to raise money. Economists say that such sovereign bonds are sold when a country's spending is higher than its income. Funding is provided by selling such bonds in the international capital market. Sri Lanka has done just that. Forty-seven percent of Sri Lanka's total debt has been taken up by issuing various commercial bonds. But not much thought was given to how this money would be paid. Sri Lanka has a debt of twelve and a half billion US dollars due to international sovereign bonds. In addition, the government has taken many loans from the Central Bank of Sri Lanka and domestic financial institutions. In total, this year, Sri Lanka will have to pay about seven billion dollars in debt. Of these seven billion dollars in debt, one and a half billion dollars in foreign debt. But this year Sri Lanka will not be able to pay these debts at all. However, the country's central bank said that in the last two years, two and a half billion dollars have been repaid from the loans taken for international sovereign bonds. Sri Lanka has paid five hundred million dollars in the last month of January. As a result, Sri Lanka's foreign exchange reserves have been strained. Because of that the country is not able to import fuel oil and other daily necessities.


 Sri Lanka is burdened with debt on the one hand. On the other hand, in 2019, the President of Sri Lanka decided to reduce vat and tax. Many were surprised at this move. The VAT rate was reduced from fifteen percent to eight percent. The main reason for reducing Vat tax was to stimulate the economy. But within a few months, the corona virus epidemic started around the world. The reduction in income tax and VAT reduced the government's revenue by up to twenty-five percent. As a result, the government is forced to take more debt. A large supply of foreign currency in Sri Lanka comes from the country's tourism sector. .


 The tourism industry was closed for almost two years due to the corona virus epidemic. Most tourists in Sri Lanka come from China. But due to strict restrictions related to Corona virus in China, tourists could not come from China. As a result, the country's tourism sector is a disaster. Besides, due to the epidemic, the business trade is greatly affected. Another great place to earn foreign exchange in the country is through remittances sent by Sri Lankan citizens working in different countries. But Sri Lanka suffered more due to the stoppage of remittance flow during the corona virus epidemic. Before the pandemic, Sri Lanka earned twelve billion dollars from tourism and remittances. Even if the money is stopped, during this period the Sri Lankan government is obliged to pay the installments of the foreign debt. As a result, there is a huge pressure on Sri Lanka's economy from all sides.


In two thousand nineteen, the use of chemical fertilizers and pesticides in agriculture was banned and organic agriculture was made mandatory. That is why the import of fertilizers is banned in Sri Lanka. This has a direct negative impact on the agricultural sector. Then the production of rice in Sri Lanka decreased up to twenty percent. Sri Lanka, which was once self-sufficient in rice production, was forced to import four hundred and fifty million dollars worth of rice. That's why the price of rice, the country's staple food, is increasing. At the same time, food shortages are evident throughout the country. Then the government paid two hundred million dollars in compensation to the farmers. Organic agriculture has a negative impact on tea production in Sri Lanka. Sri Lanka used to earn a lot of foreign exchange by exporting four. There also comes a big shock. Sri Lanka could not pay two hundred and fifty million dollars for the import of fuel oil from Iran. In return, they will export five million dollars worth of tea to Iran every month. In this way the debt will be gradually paid off with tea. Analysts say that not enough research has been done on the subject before introducing organic farming. Because of that, instead of profit, there has been a loss. Sri Lanka needs foreign currency to deal with the current crisis. That's why the country has been approached by many. Sri Lanka has applied for more loans from China, India and Bangladesh. Sri Lanka is also negotiating with the International Monetary Fund or IMF. The country devalued the currency by up to fifteen percent to get loans from the IMF. Currently, Sri Lankan currency is two hundred and ninety five rupees against one US dollar. And one Bangladeshi taka is worth three and a half rupees in Sri Lanka. The value of their currency continues to fall. Economists say Sri Lanka can come out of the current crisis through medium and long-term measures. For that, the export income of the country should increase. He needs foreign investment. Apart from this, the country's revenue and budget management has to be improved and there is no option to reduce expenditure in non-essential sectors. However, observers think that the country will not be able to get out of the debt burden on Sri Lanka very easily.

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