Sri Lanka is currently going through the worst economic downturn faced since independence from Britain in 1948. Facing power outages, lack of food, bankruptcy, and overwhelmed by numerous loans, the island nation is struggling. However, it hasn’t always been this way.
In the 19th and 20th centuries, Sri Lanka became a plantation economy famous for it’s cinnamon, rubber, and Ceylon tea, something that remains a trademark national export. The development of ports under British rule strengthened the island and made it a center of trade. It’s major economic sectors are tourism, tea export, clothing, rice production, other agricultural products, and overseas employment, especially in the Middle East. From 2005-2011, Sri Lanka’s per capita income doubled.
However, in 2016, it’s debt started to accumulate as infrastructure started to develop. This led to a near state of bankruptcy. In the fourth quarter of 2016, there was an estimated debt of $64.9 billion. In 2018, China agreed to bail out the country with a loan of $1.25 billion to deal with foreign debt repayment spikes in 2019-2021. In September of 2021, Sri Lanka declared a major economical crisis. But how exactly did Sri Lanka fall into debt? How did such a thriving economy crash? There are three main factors that caused this. Infrastructure, COVID, and the previous ban of chemical fertilizers.
Toruism and overseas employment, both of which provided the country with an input of foreign currency, crashed due to the pandemic. People stopped traveling, during this period, and people were also losing jobs. Prior to the pandemic, the country had proudly achieved upper-middle-income status, yet today half a million people have sunk back into poverty.Apart from that, there was also a ban on fertilizers put in place, partly to save foreign exchange. However, this led to domestic rice production falling 20% in the first six months. As a result, they were forced to import $450 million worth of rice. The ban also devastates the nation’s tea crop, the primary export and source of foreign exchange. Although the policy has been suspended and the government is offering $200 million to farmers as direct compensation, it hardly makes up for the damage and suffering the ban produced.
Today, they now heavily rely on imports from other countries. “Soaring inflation and a rapidly depreciating currency have forced Sri Lankans to cut down on food and fuel purchases as prices surge.” (foreign policy.com) This has led to power cuts lasting up to 13 hours a day. The Rajapaksa government also promised tax cuts, which were enacted before the pandemic. With less money from the taxes, the government was unable to make some of these necessary purchases.
Sri Lanka has also fallen into debt due to loans from other countries. One of them is China. Sri Lanka, situated between the key shipping route between the Malacca Straits and the Suez Canal, which links Asia and Europe. However, the only major port in Sri Lanka is the Port of Colombo, and it is catered towards container handling and is unable to provide facilities for port related industries and services. Therefore, a new port near the city of Hambantota, which has a natural harbor and is close to international shipping routes, was proposed. With the help of the Chinese government and workers, this port was built.
This relates to China’s Belt and Road Initiative; a global infrastructure development strategy developed by the Chinese government to invest in nearly 70 countries and international organizations. It’s about improving the physical infrastructure through land corridors that roughly equate to the old Silk Road. This also includes a maritime Silk Road along ports. Hambantota was built with Chinese investment to become part of this. “But the billion dollar project using loans and contractors from China became mired in controversy, and struggled to prove viable, leaving Sri Lanka saddled with growing debts.” (bbc.com) In 2017, Sri Lanka agreed to give “state-owned China Merchants a controlling 70% stake in the export on a 99-year lease in return for further Chinese investment.” So basically, using a loan from China, Sri Lanka is paying Chinese workers to build this port, causing the money to go directly back to China itself. So they’ve pretty much fallen in what is called a ‘debt-trap.’ This has been seen in other parts of the world, where, “Chinese lending has also proved controversial, with contracts whose terms could give China leverage over important assets”, can be seen. Some examples include:
- Sri Lanka