Video: Sri Lanka's Economic Crisis Explained | Reasons, causes & Politics of SL

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in this video we're going to understand the sri lankan economic crisis as you may have heard from the news sri lanka is facing its worst financial crisis since its independence in 1948.

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this country is currently running short of foreign exchange reserves because of which they are unable to import essential commodities like food fuel and medicines sri lanka is also running short of papers because of which the country has

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cancelled all their exams and that has apparently affected millions of students and then it is also said that sri lankan government has approached the international monetary fund for a bailout bailout basically means asking

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financial assistance in order to save any business or in this case you can say save the country's economy from collapsing and you also need to ponder upon the fact that the sri lankan government is asking this kind of financial assistance on deferring loan

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repayment a differing payment basically means an agreement between the lender and borrower where the borrower requests the lender to give them loan and that loan will be repaid at a later date when situation would be comparatively better

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so this pretty much explains how much sri lankan economy is on the verge of collapsing now india has granted one billion dollar to sri lankan government as credit so that the country can use that money to buy essential commodities

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and since this money is given in the form of credit which means sri lanka has to repay this money to india in the future when situation becomes comparatively better as of now srilanka has a huge pile of public debt which is basically 110 of

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its gdp and the inflation rate is at 15 which is the highest inflation rate since 2008. pakistan and sri lanka are both currently in similar situation i have made a video on pakistan's current situation if you want to watch

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that you can find the link of that video in top right corner currently 277 sri lankan rupee is equal to 1 us dollar pakistani rupee is at 180 and the indian rupee is at 76. that

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means if a particular country's currency depreciate with respect to the dollar then it will increase the cost of import depreciation means weaker for example one u.s dollar used to be rupees 70 but now it is equal to 76 indian rupees that

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means the indian rupee has depreciated it has become weaker compared to the us dollar if at all india wants to import anything then india has to pay more indian currency to acquire goods similarly the sri lankan rupee is at 277. that means

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if sri lanka wants to import something they will have to end up paying a lot of sri lankan rupee that means import becomes expensive and that will have a trickle-down effect on sri lanka's domestic market and always remember whenever any

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countries import dependent meaning they import more than what they export it can distort the country's balance of trade so always remember maintaining the appropriate balance of imports and exports is crucial for any country

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if you look at the formula of finding out gdp gdp is equal to c plus i plus d plus bracket x minus m c is consumer spending i is investment g is government spending and x is export m is import

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in this equation export minus import will give you net export when export is more than import then the net export figure is going to be positive and this actually means that a country is in trade surplus similarly when exports are

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less than imports or imports are more than exports then the net export figure will be negative and that means the country has a trade deficit a healthy economy has to find that right balance between its exports and imports

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it is always recommended that the trade deficit of a country should be low having a trade surplus is ideal not every country can achieve that but if a taller country achieves it that means a country has plenty of resources to

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support its economic activities and at the same time it can also export since in this video we are talking about sri lanka their public debt is around 110 of their gdp they are in a situation wherein they have no other option but to

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borrow money from countries and international financial organizations like imf world bank asian development bank etc because right now sri lanka needs money to keep its economy from collapsing and on the other hand even if they manage to

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get the money they will not be able to pay it back anytime soon so if you look at the current situation it is like this even if sri lanka acquires fund they will sure sure default meaning they will not be in a position to repay the loan

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anytime soon but they will need that loan money to keep its economy running now try to understand this in personal sense are you willing to lend money to someone about whom you are sure that they will not be able to return your money anytime soon will you still lend

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money that is the same question sri lanka is facing anyhow india has given 1 billion credit for purchasing immediate goods like food fuel medicines etc and india is also fine with the time limit

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of the repayment but then if you see 1 billion is not enough for sri lanka the sri lankan policy makers have to find a way out of this tight spot it is going to be as bad as biting a bullet so as of now srilankan government has two options

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the country needs to either restructure their debt or go to the international monetary fund for a relief package as i have mentioned sri lanka's finance minister has approached the imf and if you remember in jan 2022 sri lanka was

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not in favor of approaching the imf rather it approached china for another loan to address its economic crisis now here is an important question why did srilanka think that it's better to go to china for loan rather than going

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to the imf let me tell you something about imf you have to understand that if you want a loan from the imf they have certain conditions as you may know imf is controlled by western countries and part of those condition include as a

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country you will have to keep collateral in order to get a loan which is normal if you need loan you will have to keep something as collateral but here is an interesting condition of the imf they also interfere in the government

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functioning in the name of assistance imf indirectly maintains a leverage by giving orders to borrowing governments to correct their macroeconomic imbalances in the form of policy reform if i have to put it in simple words

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suppose you take a loan from the imf the imf has certain conditions if you fulfill it only then you get the loan so part of those condition also include that imf will give you order and directions for changing your economic

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policies in the name of reform meaning they will not only give you loan money but they will also tell you how to use that money more of like interference that is why many countries are reluctant in approaching the imf for any kind of

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financial assistance they rather look for a country who can lend without interfering but then for sri lanka it is desperate time calls for desperate measure that is why they have approached the imf however you also have to

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understand that imf has many conditions before giving any loan and looking at sri lanka's current situation imf also have to keep in mind the risk of defaulting anyone who lends money will also do their assessment whether so and so

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person organization or a country can return the money on time otherwise it will eventually add up in the existing debt apart from imf sri lanka also needs to restructure their debt so restructuring of debt means let me explain it to you

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with an example suppose you have debt in four different areas of your life so naturally you are going to experience financial distress and liquidity problems now what you will do is you are going to plan out a way through which you can get

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someone to refinance you on your existing debt meaning you will ask for more loan to repay the main loan now what you will do is you are going to plan out a way through which you can get someone to refinance you on your existing debt

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meaning you will ask for more loan to repay the main loan obviously you also have to pay some interest on the new loan or maybe you also need to keep something collateral which is not of any immediate use to you and you would not mind recovering it later or sometimes

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you also have to sell assets to get that money whatever it is the main thing is you have to pay interest on any amount you borrow usually that interest amount should be lower than the interest that you pay on your existing main debt the idea is to

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accumulate smaller debt to manage the load of overall larger debt this is called debt restructuring of course it also includes other things for example finding a suitable compassionate lender who can understand your problems and

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lend you money and they would not mind waiting until you come to a stable position so all of this also matters so it's quite a task it's not that easy so even sri lanka has to do something like this only then they will be able to

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keep the economy running while it looks all easier theoretically but if you see on the ground people of sri lanka are angry and frustrated opposition leaders are also using this as an opportunity to create more panic

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but then as of now you can see through the news that people are protesting against the government they are demanding president gotabaya rajapaksa to resign now the main question is how did sri lanka ended up in this economic crisis

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the actual crisis started since the end of 2019 but then if you see sri lanka's foreign debts started rising since 2010. you can see in this graph after 2010 there was a sharp rise in sri lanka's

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external debt and if you go further deep you will notice that sri lanka owes most of their debt money to countries like china japan even india but comparatively lesser other than countries sri lanka also owes a lot of money to world bank

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asian development bank then sri lankan government has also borrowed a lot of money from the international market which comes under the category of market borrowing usually any government borrows money from the market to meet its expenditure

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it is widely believed that sri lanka fell into this kind of economic crisis due to the short-sightedness of their corrupt politicians since 2005 till day there has been only three presidents the first one is mahinda rajapaksa then

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matripala sena and the current president gotabaya rajapaksa and if you look at all the political parties of sri lanka you will realize that they are either socialist or democratic parties hence there is a huge influence of the government in almost every aspect of

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country's business you have to understand that socialism and democratic parties are all brainchild of communism i'm not saying they're same obviously there has to be some subtle differences otherwise everyone will know their bluff but they

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are brainchilds of communism if you go into the history of each and every president or senior influential political leaders of sri lanka you will notice that back in the 50s and 60s they were directly or indirectly part of the communist party and furthermore you will

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find a lot of trade unions and ngos in sri lanka who play an active role as political pressure groups always remember any kind of union will have its root traced to the communist ideology and to be very honest that is what has opened the doors to huge level of

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corruption in sri lankan politics if you look at the two largest political parties in sri lanka the sri lanka freedom party matripala sirisena and mahinda rajapaksa belong to this party and then there is another party which is sri lanka people's front or commonly

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known by sinali's name srilanka purdujana peramuna the current president gotabaya belonged to this party and by the way mahinda rajapaksa and gotabaya rajapaksa are brothers so basically rajapaksa brothers are controlling

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majority of the political parties in sri lanka now if you want to understand the politics of sri lanka you basically have to just understand that the whole politics of sri lanka is a reflection of the historical as well as political differences between two main ethnic

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groups the first one is the sinhala group who are buddhists and they are in majority and then comes tamil group they are hindus and then there are muslims christians and others who are in minorities and obviously tamil people's

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concentration is more on the northern and eastern side of the sri lankan island even india has a huge population of tamil people so indian tamil and sri lankan tamil all share the same culture with minor differences in terms of speaking style and few other things

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now if you look at the two largest ethnic groups that is the sinhalese and the tamils sinalis make around 75 of the entire population and they tend to be buddhist and the sri lankan tamil people are hindus similarly even vast majority

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of sri lankan muslims speak tamil as their mother tongue anyhow so what happened is that both the sinali's community and the tamil community they have their own historical and religious history and their claims because of which quite often there is a

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lot of disagreements between the two ethnic groups and this difference is reflected in the sri lankan politics if i have to give you an example in june 2020 president gotabaya rajapaksa formed a presidential task force for conducting

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a comprehensive survey of archaeological sites in the eastern part of sri lanka this shows that how much the government of sri lanka is serious about protecting its own ethnic groups and its religious identity this is a method of using archaeological

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evidences and findings and make it a tool for securing political interests just think about it have you ever heard of any government bringing the archaeological department under the defense ministry so anyhow my point is that the disagreements between the

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sinhalese group and the tamil group is openly visible in sri lankan politics and because of the sinhalese buddhist population being in majority sri lankan tamil political leaders often use this as a reason for countering the government in fact the sri lankan civil

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war from 1983 to 2009 where the ldte for the sri lankan government for having an independent tamil state this civil war is actually the beginning point of today's racial ethnic and religious tension between the majority and the minority in sri lanka

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now i'm going to put everything on the timeline so that you get a better picture of it the civil war ended in 2009 but corruption and authoritarian attitude had reached new heights under the rule of former president mahinda

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rajapaksa from 2005 to 2015. after mahinda rajapaksa matripala sirisena became the president of sri lanka from 2015 to 2019. both of them belong to the same political party that is the sri lankan freedom party and then

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after 2019 president gotabaya rajapaksa was elected he is also the brother of mahinda rajapaksa while president gotham rajapaksa belong to the political party called sri lanka jana peramuna if you see the rajapaksas are four brothers and

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they pretty much control the entire sri lankan government and it is also said that the whole rajapaksa ruling family controlled almost 70 of the entire sri lanka budget both the brothers and their family and friends have profited heavily

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in fact if you see right now gotabaya rajapaksa is the president of sri lanka and his brother mahinda rajapaksa is the prime minister of sri lanka so they pretty much appoint everyone within the close circle in various government departments

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in 2016 president matripala sirisena publicly said that half of sri lanka's public procurement contracts are tainted by bribery and corruption obviously before him mind the rajapaksa was the president and then in 2018 president

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matripala sirisena's own chief of staff and other officials were arrested for taking bribe and then in december 2017 if you remember the sri lankan prime minister ranil vikram is singhe he officially handed over the strategic southern port

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of hanban dota to china on a 99 years lease the reason he handed over the lease of the seaport to china is because their government realized that it will be difficult for them to repay the chinese loan that they took to build the seaport

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so it was better for sri lanka to give it to the chinese on lease for 99 years and by the way this is also called the chinese debt trap diplomacy because when china decided to invest in sri lanka's seaport they very well knew that sri

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lanka will not be able to repay the loan on time this is what is called detroit diplomacy of course the sri lankan government is corrupt and hence it was easy for china to take advantage of it we can't exactly blame china but then

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even china merged its interest with corrupt sri lankan politicians actually this deal was done by the prime minister and not the president matripala sirisena that is why next year that is in 2018 president matripala sirisena

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removed prime minister ranil vikram singh and as you may think that president matthew palace cena did a great job but then he appointed mahinda rajapaksa as the prime minister who was also former president of sri lanka currently gotabaya rajapaksa is the

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president of sri lanka and his brother mahinda rajapaksa is the prime minister of sri lanka so you see how family dynasty is running the sri lankan government everyone is corrupt right from the president to the prime minister and that is why i took the timeline from 2009 to

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present because everything that is happening today in sri lanka is a resultant of what went wrong since 2009. as you can see in this graph after 2010 there was a sharp rise in the sri lanka's external debt all this external

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debt includes money borrowed from countries like china japan india international financial institutions like world bank asian development bank in the name of infrastructure projects and as you know during this time period the rajapaksa family were in power so

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naturally they benefited heavily and that's where the whole corruption level increased in sri lanka to an extent that today it is facing its worst economic condition if you think about it this is the same situation that happened in pakistan when

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cpec started in 2016 many pakistani top bureaucrats army generals and politicians were involved in taking bribe in corruption scandals see if you think from china's perspective they have their own strategic interest and that is how they

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will invest for example in pakistan cpec is china's strategic interest similarly the seaports in sri lanka is china's maritime strategic interests so any country in this world will do everything to secure its interests even if they have to bribe the government officials

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or any other way however what you have to realize is that it is up to the government of a particular country to not be greedy and fall into the trap of debt pakistan and sri lanka both are good examples who fell into the dead trap of chinese investment and then as you know

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in 2020 due to the pandemic followed by lockdown the tourism industry of sri lanka which accounts for about 10 of the country's gdp it got badly hit and that led to a huge foreign exchange crisis because no one was traveling to the

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island so pandemic is also one of the reason behind current economic crisis of sri lanka and then if you remember last year in 2021 the sri lankan government had banned the usage of all chemical fertilizers pesticides vd sites and

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fungicides it was a move by the government to push the agricultural sector towards organic farming in fact that decision turned out to be a disaster and crop production of sri lanka started declining furthermore the price of food went up because the food

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mafia people started holding essential food items like rice sugar pulses for making money so even this government policy is also one of the reason behind current economic crisis of sri lanka so if i have to summarize quickly as to what are the reasons that led to the

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decline of silicon economy they are massive external debt then rapidly depleting foreign exchange reserves because of heavy imports then decline in tourism due to the pandemic after that high level corruption in the government

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and banning of chemical fertilizers which hampered agricultural production and now we are also seeing the first trickle of sri lankan refugees arriving at india's tamil nadu coast you see debt war regime change all causes serious

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economic crisis and that ultimately results in migration and that also puts burden on nearby countries in the name of humanity these are some serious consequences which i believe there is no answer to because on one hand every country wants

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to grow and that is how governments design their policies and that is also how countries are accumulating massive debts on the other hand we also have to understand that an economy based on endless growth is unsustainable somewhere we have to draw that line

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otherwise such consequences are unavoidable so this was everything that you had to know about the sri lankan economic crisis i hope you found this video informative thank you for watching it