At first, let's understand the situation in Sri Lanka at this moment. In February 2022, Sri Lanka's foreign currency reserve was only $2.5 billion. If we compare this with January 2019, it has gone down by 70%. If any country has low foreign currency reserves, it becomes extremely difficult for them to import goods from outside. Speaking of imports, there is another big problem that is troubling Sri Lanka. The foreign currency reserve has dropped so low that they can only meet one month's worth of import requirements. Moreover, Sri Lanka has another major problem. They need to repay a $4 billion loan. You might be wondering why Sri Lanka had to borrow so much money or how they ended up in this dire situation. Let me explain briefly. Sri Lanka has implemented many luxury projects over the last 15 years, including seaports, airports, highways, and megacities, which have cost the country a lot of money. However, let's briefly understand about this necessary but luxurious project. Sri Lanka has undertaken several mega projects in the last 15 years, including seaports, airports, highways, and expressways, close to the capital Colombo. This new city, named "City", is being built by reclaiming land from the sea and will cost approximately 1.5 billion dollars. The project is expected to take about 25 years to complete. Hong Kong, Dubai, and Singapore are also collaborating with China to build a new city, and Sri Lanka is also creating a new city with China. Sri Lankan experts say that these projects have taken loans from various sources for construction, but many of these projects have not been financially viable despite spending a lot of money. This article is the reason why Sri Lanka is struggling with so much debt. Those who have given Sri Lanka more loans than this, they want it. I hope you can understand what I'm saying. If you can't, please let me know in the comment box. We will discuss it in detail next time.
Now let's find out where Sri Lanka took loans from and how much debt it has taken from China over the past decade. Sri Lanka has taken a loan of 5 billion dollars from China, which is the largest lender to Sri Lanka, along with various international currency markets such as the Asian Development Bank and Japan. Another source of Sri Lanka's government debt is the Sovereign Bond. Since 2007, the country's government has issued sovereign bonds for economic financing. In simple terms, if a country spends more money, it sells sovereign bonds. In fact, such bonds are sold in the international financial market and the revenue is used for economic financing. Sri Lanka is doing the same and has a total of around 12 billion US dollars in international sovereign debt. But they haven't really thought about how this will be paid for. Let's go back to the topic of foreign currency reserves. I mentioned earlier that Sri Lanka's foreign currency reserves have fallen so low that they will only be able to meet one month's import needs. However, when we look at the products that are imported, we see that they are mainly luxury items such as imported phones, laptops, and cars. These questions are relevant to everyday life and depend on the products that are imported. Sri Lanka imports products such as lentils, pharmaceuticals, and so on, which are essential items. Fortunately, these items are imported by Sri Lanka, such as DAL and pharmaceuticals, but unfortunately, we cannot import them from other countries. However, Sri Lanka has to import these items from other countries.
Since they have to import these things and foreign currency is low in their country, it has become difficult to import these goods, and as a result, the prices of basic commodities in this country have rapidly increased, which is called inflation. In the beginning, only Sri Lanka saw a 25% inflation rate last month. People are facing difficulty in buying these basic items. For example, rice, sugar, milk, etc. A Sri Lankan worker told Indian Express that the price of rice in Sri Lanka can reach up to 500 rupees within a week. Now Sri Lanka's currency, the LKR, means the price of rice has reached up to 290 rupees. The list shows that the price of 400 grams of milk costs 1790 rupees. Such situations have arisen now that some restaurants in Sri Lanka are selling a cup of tea for 100 rupees. A Sri Lankan school teacher said that the monthly expenses of his family of three were 30,000 rupees, but last month their expenses were 83,000 rupees.
Healthcare money is needed because children are facing severe difficulties in their food supply. It has become difficult for people to procure rice and lentils, and if there were no electricity problems, the situation would not have been so stagnant. So much money is being spent here that Sri Lanka's electricity is fluctuating. The Sri Lankan electricity minister wants to save electricity and has instructed to turn off the streetlights and an electricity board. "The price of cooking gas is now sky-high, and gas is being supplied only once. The price of a gas cylinder has risen from 3000 to 4000 rupees. 200 liters have been purchased."
It has increased by about 12 percent in Indian rupees. Due to the crisis, people are now facing food and economic hardships. As a result, people's lives have become very difficult. Some time ago, a person named Rameshwaram and his six refugees were given 50,000 rupees to come to an island on the border of the water and then a refugee camp was set up to feed them, after which another group of ten refugees came. They said they had spent three lakh rupees. This can help them safely reach India from their country. Therefore, I hope you understand that people are facing difficulties now because of the current situation in Sri Lanka.
After gaining power in November 2019, Sri Lanka's President made the decision to reduce VAT and taxes. The tax rate was reduced from 18% to 15%. The original reason for the reduction was to boost the economy by improving communication in the field of economics. A similar initiative was taken by former President Mahindra Rajapaksa immediately after the end of Sri Lanka's civil war in 2009, as the war-torn economy was in need of improvement. The current President, Gotabaya Rajapaksa, followed suit, but within a few months, the country was hit by the COVID-19 pandemic. This was stated by Professor Aziz, an economics professor at the University of Colombo.
The revenue of the government of Professor Karl has decreased by up to 25%. As a result, the government has been further burdened with debt. The issue of reducing taxes, which was commanded by the former Senior Deputy Governor of the Central Bank of Sri Lanka or his institution, was a huge mistake. The reduction in tax has resulted in a decrease in the government's income, and businesses have been affected by the COVID-19 pandemic. On the other hand, the government is under tremendous pressure to repay its debt. Let's now talk about the people who have come out of Sri Lanka and the way the Indian government has viewed them from an economic perspective. This point should also be mentioned that according to the intelligence officers, how the Indian government has viewed them.
In the coming weeks, Tamil Nadu Chief Minister M.K. Stalin met with Prime Minister Narendra Modi to discuss the possibility of 2,000 refugees from India coming to Sri Lanka, and the Tamil Nadu government sought permission from the Indian government for Sri Lankan Tamil refugees to come to Tamil Nadu, so that the Indian government could provide humanitarian assistance. In addition, India is supporting Sri Lanka in other ways, such as on March 17, Sri Lanka's finance minister signed a billion-dollar credit line with New Delhi. Moreover, India has swapped currency with Sri Lanka, exchanging 400 million dollars, and now Sri Lanka has requested another one billion dollar credit line from India, so that they can import essential commodities for their country and have some control over the situation. However, India is not the only country that Sri Lanka has sought assistance from; they have also gone to China for help.
And this: You may already know that Sri Lanka has been drowning in debt to China, but despite repayments, Sri Lanka has requested debt restructuring. They are currently in talks with the IMF and World Bank, as well as negotiating a 2.5 million credit line from China. Sri Lanka's President will travel to Washington, DC next month to create a bailout plan to save Sri Lanka. The big question is why did this happen, and what are the reasons behind Sri Lanka's current situation? There are several reasons, some of which I have already mentioned, but others include the devaluation of Sri Lanka's foreign currency, the impact on tourism due to security concerns, and the fact that in 2018 Sri Lanka was a top destination for tourism among local places in the world, with thousands of foreign tourists coming to Sri Lanka, particularly to popular places.
In 2018, 2.4 million foreign tourists visited Sri Lanka and tourism accounted for almost 12 to 13 percent of the country's economy. However, due to the COVID-19 pandemic, the tourism industry has been severely affected and has been shut down for almost two years. Before the pandemic, Sri Lanka was the most popular tourist destination in the country, but due to strict restrictions on the spread of the coronavirus in China, tourists could not come, resulting in a setback in the tourism sector of the country. As a result, the country has been receiving foreign currency from Sri Lankan nationals working in various countries, but that too has been severely affected during the pandemic. In 2019, on Easter Sunday, several bombings occurred in the country, targeting three churches and three hotels. The incident, known as the Easter Bombing, resulted in the deaths of 269 people, including 45 foreign nationals. Perhaps it is understandable that the bombing that day destroyed the tourism industry.
Seven Sri Lankan citizens, including a local Islamic extremist group, were involved in the bombing. As a result, the following month, there was widespread anti-Muslim violence in Sri Lanka, with many Muslims' homes, shops, and vehicles attacked and destroyed. The situation was brought under control with the deployment of over 100 military personnel in the city, even curfews were imposed, and the government blocked Facebook and WhatsApp to prevent the spread of rumors. However, the ban on social media only fueled religious tensions, which had already increased after the anti-Muslim riots in 2018, prompting the Sri Lankan government to declare a state of emergency at the time and block Facebook. Later, it was discovered that the identified extremist groups were responsible for the attack. When Facebook's documents were exposed, it was revealed that Facebook played a major role in this riot, and WhatsApp also gradually promoted communal propaganda.
Although Facebook apologized for the real incident, tourism had a terrible impact due to this. After all this, the President of Sri Lanka came with a masterstroke. In the 2009 election, he pledged to transform the country's farmers into organic farming, banning the use of chemical fertilizers and pesticides in agriculture. Rice production decreased by up to 25 percent, and as a result, Sri Lanka was forced to import $450 million worth of rice, leading to an increase in the price of rice. Organic agriculture also had a negative impact on tea production, leading to a decline in exports and foreign currency earnings. For these reasons, the government incurred a loss of $200 million to compensate farmers for their losses, and the country faced a food shortage crisis.
Now let's talk about printing and the need for foreign currency in Sri Lanka to deal with the current crisis. Many people are concerned that the country is on the verge of a foreign currency reserve crisis and are discussing with the IMF about getting loans up to 15% devaluation of the currency. Sri Lanka has also applied for loans from China and India. Sri Lanka urgently needs to purchase essential food, medicine, and fuel, which is why it is seeking loans from other countries. Recently, India provided Sri Lanka with a loan of 1 billion dollars, according to the Central Bank of Sri Lanka. Sri Lanka's foreign currency reserve was only 16 billion dollars, which is the lowest in the last ten years. As we mentioned earlier, all the ministers of the Sri Lankan government have resigned. This is the latest update on the situation, but despite this, people are protesting on the streets against the Prime Minister and President of Sri Lanka, and many people are breaking the curfew and coming out on the streets in anger.
I just hope that by providing Sri Lanka with the credit lines, they can successfully recover and revive their economy, and bring back prosperity for their citizens, regardless of any population size and vulnerability in any country. However, if Sri Lanka's situation deteriorates severely, it can have a devastating impact on neighboring countries such as India and Bangladesh, making them more vulnerable. This incident reminds us that taking loans from other countries for non-essential activities can sometimes be risky. All of this information has been verified by the latest statistics
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