Sri Lanka Meltdown: How India Can Help Its Crumbling Economy

Needless to say, Sri Lanka would need corrections at multiple levels beyond just economy.

4 min read

The current situation in Sri Lanka is an alarming one – long queues are being seen for the purchase of essential supplies, there are mass protests and public unrest due to acute shortages, and the country is witnessing a sharp increase in the cost of goods and services, including food, fuel and travel costs.

Though many factors have precipitated this mess, the primary reason is poor economic governance. Sri Lanka is slowly heading towards bankruptcy as the current monetary reserve of the country, which is accounted for about $2.3 billion as of March 2022, would not be enough to pay the $7 billion foreign debt, including international sovereign bonds. National inflation skyrocketed to 17.5% in February 2022 as per the National Consumer Price Index, and foreign debt was at a staggering $35 billion.

How COVID & the Russia-Ukraine Crisis Wrecked Sri Lanka

Despite the economic instability surrounded by political changes, the economy seemed to be in a manageable situation till the elections in November 2019. However, things turned bad from 2020 onwards. The COVID-19 pandemic inflicted further damage as the two main sources of revenue for the island nation – tourism and remittances from abroad – suffered drastically. The ongoing Russia-Ukraine conflict has also contributed to the downfall as Russia is one of the top buyers for the Sri Lankan tea industry, and the conflict has resulted in Russia slowing down its purchases.


The 2019 elections saw the return of the Rajapaksa brothers to power with Gotabaya Rajapaksa becoming the President, the eldest brother and former President Mahinda Rajapaksa becoming the Prime Minister, and the youngest brother, Basil Rajapaksa, the Finance minister. The popular mandate was for improving the economy of the nation, as also many other avenues.

However substantial tax rebates for the people of Sri Lanka by the new government didn’t help improve the situation, as it was clear that the country was in no state to offer such tax cuts. The three brothers still remain in their position and are trying to address the situation, but a quick fix is in no sight.

The malaise is deep-rooted. Bad monetary policies pursued over the years have to be addressed with comprehensive structural changes.

As people line up in long queues to get food and rationed fuel, a few places are seeing military monitoring of the crowds. The Bar Association of Sri Lanka (BASL) has also filed a petition in the Supreme Court saying that they were compelled to come to the court due to the severe shortages of essential goods and services, the fear of a breakdown in law and order, and a substantial threat to the rule of law.

Mounting Foreign Debt

Sri Lanka’s economic woes started with expanded external borrowings. China, which is notorious for its debt-trap system with many other countries, accounts for nearly 10 per cent of Sri Lanka’s total foreign debt in the form of concessionary loans, apart from commercial loans through Chinese state banks that have been taken by the island nation.

The terms of these loans are tough and failure to repay them has already resulted in Sri Lanka needing to hand over control of the Hambantota port to China for 99 years as part of the loan repayment process. It remains to be seen how the Chinese will step in at this stage to ameliorate the situation. Even the International Monetary Fund (IMF) and other multilateral institutions have to work out some measures to help the nation come out of the situation.

India stepped up, and in January 2022, it gave Sri Lanka $400 million for the purchase of basic amenities like petroleum products. This week, it sent 40,000 tonnes of diesel to Sri Lanka. On 17 March 2022, India extended another $1 billion credit line to Sri Lanka to buy urgently-needed essential items such as healthcare and food. Both governments have to work out a strategy for the disbursal of the aid. Many people have left the island nation and have come to India in the last few weeks to India amid the precarious situation.

The government will have to take solid steps to come out of the current situation and steadily effect prudent governance. At the top would be the need to restructure the debt, including that with China, so that the debt-servicing burden is lifted for at least a couple of years.

The government should engage with financial experts on ways to handle the fiscal policy situation. That would entail clear transparency and accountability in governance and decision-making.

Fixing the Economy Is Just the First Step

Along with economic reforms, some political changes are also being espoused by many in the country and also a few other nations. The abolition of the 20th amendment of the Constitution and the Prevention of Terrorism Act (PTA) are being seen as crucial to a finding way forward. This will help in achieving a more inclusive governance model, wherein communities who have been wronged will also become part of the nation-rebuilding efforts.

As an immediate measure, relief should be provided to the vast majority of citizens who have lost practically everything. Farmers need to be supported in growing crops optimally after the major organic fertiliser fiasco. Further, there should be a renewed focus on tourism and tea exports. With some respite from COVID-19, tourism is picking up in the region and with efficient tariffs and services, the hotel and service industries can bounce back.

Needless to say, Sri Lanka would need corrections at multiple levels, and for both the long and short terms. The nation will collectively have to design a roadmap for itself.

(Subimal Bhattacharjee is a commentator on cyber and security issues around northeast India. He can be reached @subimal on Twitter. This is an opinion piece and the views expressed are the author’s own. The Quint neither endorses nor is responsible for them.)

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