From Organic Farming to Tax Cuts – How the Sri Lankan Government Created the Country’s Economic Crisis

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In recent years, the Sri Lankan government has started spending more on social welfare programs for people, although it does not have enough money to maintain the required budget deficit. As a result, Sri Lanka is going through an unprecedented economic crisis where weeks of protest by the Sri Lankan people demanded the resignation of the Sri Lankan President and prime minister. As well as the protesters demanded a change of government and governance. This economic crisis has therefore led to a political crisis as well. The crisis is now so deep that Sri Lanka‘s coffers have dried up and it can no longer afford to pay for imports.

Millions of its inhabitants are bearing the brunt of this economic collapse, as basic commodities are scarce, power outages are frequent, prices soar and the value of incomes erodes. Sri Lanka has suspended payments on its international debt over $51 billion, actively putting the country in default. For a brief period, the stock

the exchange was also suspended. Sri Lanka’s currency is the worst performing in the world. Sri Lanka devalued the rupee and curbed non-essential imports and almost doubled its interest rate. Sri Lanka’s economy has lost much of its tourism income due to the pandemic and remittances also dried up. In recent years, Sri Lanka has borrowed heavily to invest in infrastructure development such as ports, roads and railways. These projects were not very profitable compared to the cost of these development projects. Thus, the policies of the Sri Lankan government have not resulted in economic growth that would equate to the welfare of its people while paying off the external debt in installments. The pandemic and the conflict in Ukraine played an important, but relatively lesser role compared to the economic mismanagement committed by the government of Sri Lanka. The main reason for this crisis is also the transition to biological agriculture and tax cuts.

The ill-fated attempt to quickly switch from chemical to organic fertilizers has had a negative impact on food production. This has had a negative impact on agricultural productivity and is partly responsible for the food shortages the ordinary Sri Lankan is currently facing. The Sri Lankan government therefore made a series of bad choices from the tax cuts in 2019, then distinctly the COVID-19 pandemic hit very difficult. However, the decisions taken by the government in the wake of the pandemic, including not to restructure the debt and not to approach the IMF, have had a disastrous impact on the health of the economy. By early 2021, it had become clear that there was no way Sri Lanka could continue to repay its external debt due to the foreign exchange reserve crisis. On the other hand, Sri Lanka lacked the capacity to borrow from the international capital market to issue Eurobonds or sovereign bonds, mainly due to the pandemic and tax cuts. the Sri Lankan President admitted to making mistakes and said he To correct them.

Sri Lankan President Gotabaya Rajapaksa says we should have gone to the IMF a lot more earlier. He also said that not supplying agrochemicals to farmers was also a error. And further he said that we will supply fertilizers to our farmers again. But admitting it is too little too late, as the economy was already vulnerable as Sri Lanka’s exports had not increased for many years and the collection of taxes was also poor.

Therefore, the government should have been very careful in making economic policy, but it chose not to, for example, giving tax cuts makes no sense when tax collection is bad. They made this promise to benefits of tax reduction during the elections and once in power, they implemented it! The Sri Lankan government kept insisting they weren’t going to the IMF, so they basically waited until the last moment and then went to the IMF when people were dying of shortages. Sri Lanka’s finance minister recently started talks with the IMF. The Sri Lankan government has requested IMF assistance for the Rapid Financing Instrument (RFI) due to urgent financing needs and the sharp rise in commodity prices.

The RFI will not be granted by the IMF in Sri Lanka because the debt is not at a sustainable level. Sri Lanka will therefore continue to face a very difficult road to economic recovery. India’s aid has been helpful in Sri Lanka till April, but even the Indian government cannot do this kind of financial exoneration or give the money that the Sri Lankan government needs because it is too much !

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