Batch : EMBA 2023-25

Term : I
Subject : BGM
Group : 1
Assignment Topic : Sri Lanka- A Sovereign Debt.

Sri Lanka: A Sovereign Debt

This Project work helps us understand the Historical landscape of Sri Lankans’ Economy.
Understand the factors that led Sri Lanka to this point and then analyse the trends of various
economic factors.
What led to this collapse?

We also study each of the economic factors and help explain.

What does it mean in an economic sense and how does it impact the common man?

We studied the other economies which faced a similar situation in different aspects.
What can Sri lanka Learn from those Economies?

Finally, we conclude with Future Outlook and Conclusion.

Group: 1 Submission To
1. Akshay Nag (X002-23) Prof. Saakshi Jha
2. Arijit Chakraborty (X005-23) Economics, IIMR
3. Sarvesh Chandra (X021-23)
4. Md. Kashif Ahmed (X015-23)
5. Satyam (X022-23)
6. Vikas (X029-23)
Historical Landscape

Understanding Sri Lanka’s Economy since Its Inception

● Post Independence Era (Post 1948)
● Economic Hurdles and Policy Shifts
● Liberalisation and Beyond (Post 1977)
● Challenges of Ethnic Conflict
● Post Civil War Developments (Post 2009)

Post Independence Era (Post 1948)

Gaining independence in 1948, Sri Lanka was poised for economic success. It had a
robust export market and an established welfare system from colonial times. The
economy's backbone was agriculture, particularly tea, rubber, and coconut, which
significantly contributed to the GDP.

Economic Hurdles and Policy Shifts

Despite its promising start, Sri Lanka encountered difficulties in sustaining its export-
centric economy alongside an expanding welfare system. The late 1950s saw a pivot
towards import substitution strategies in agriculture and manufacturing due to
dwindling foreign reserves.

Liberalisation and Beyond (Post 1977)

A pivotal change occurred in 1977 when Sri Lanka embraced economic

liberalization. This shift meant relaxing import restrictions, encouraging foreign
direct investment, and reducing tariffs. However, this transition was partial, with
state-owned enterprises still heavily reliant on government support.

Challenges of Ethnic Conflict

The rise of ethnic conflict in the early 1980s posed significant challenges. It
disrupted economic activities, particularly in the Northern and Eastern provinces, and
deterred foreign investments, impacting the overall economic progress.

Post Civil War Developments (Post 2009)

Following the end of the civil war in 2009, the focus shifted towards a state-led
approach to market regulation and infrastructure development. This period also saw
China's growing influence in Sri Lanka, especially through the Belt and Road
initiative.

‘
However, from 2015 to 2019, there was a notable lack of policy action.

Decision Factors that caused this collapse

● 2019 Policy Shift: Tax cuts in 2019 wiped out almost a third of government
revenue, leading to a historically high budget deficit.
● COVID-19 Impact: Exports declined by about 20% in 2020, and tourism
earnings fell from US$4 billion in 2019 to US$606 million in 2020.
● Independent Crisis Management: The government's approach included import
restrictions, a fixed exchange rate at LKR 200 per dollar, and subsequent
floating.
● Agricultural Import Ban: The 2021 ban on synthetic fertilizers and pesticides
aimed at transitioning to organic agriculture led to a harvest failure of crops
by up to a third or half, depending on the crop.
● Debt Rollover and Exchange Issues: The debt rollover strategy involved short-
term borrowings at lower interest rates, worsening the debt profile. The black
market for foreign exchange surged with premiums of 25% to 30% over the
official rate.
● Investment and Remittances Decline: Investment approvals by the Board of
Investment were at an all-time low in early 2022, totaling only US$55 million,
compared to US$3.8 billion in 2020. Remittances declined from US$7.1 billion
in 2020 to US$5.5 billion in 2021.
KEY ECONOMIC INDICATORS WITH DATA POINTS

GDP Growth and NCPI:

The graph illustrates the GDP growth rate alongside the National Consumer Price
Index (NCPI). It shows a significant dip in GDP growth in 2020, likely due to the
COVID-19 pandemic, followed by a recovery in 2021. The NCPI fluctuates over these
years, indicating changes in consumer prices.

Merchandise Exports, Tourist Receipts, and Remittances:

The graph presents trends in merchandise exports, tourist receipts, and migrant
worker remittances. There is a notable decline in tourist receipts in 2020 and 2021,
reflecting the impact of the pandemic on the tourism sector.
Migrant Worker Remittances (2018-2021):

This table shows the trend in migrant worker remittances to Sri Lanka. There was a
peak in 2020, possibly due to increased support during the COVID-19 pandemic,
followed by a notable decline in 2021.
Stock market performance

Total Envisaged Investment (2018-2021):

The bar graph displays the total envisaged investment in 'agreement-signed'

projects. There is a drastic decline in 2021, indicating a significant drop in
investment, which is a crucial aspect of the economic downturn.
Official Exchange Rate Trend

The graph illustrates the trend of Sri Lanka's official exchange rate from 2020 to
2022. It shows a significant depreciation of the Sri Lankan Rupee (LKR) against the
US Dollar (USD) over this period:

● In 2020 and 2021, the exchange rate was relatively stable around 186.4 and
200.4 LKR per USD, respectively.
● However, in 2022, following the government's decision to float the exchange
rate, there was a significant depreciation, with the official rate reaching LKR
360 per USD by April 2022.

Inflation

The graph displays the trend in Sri Lanka's National Consumer Price Index (NCPI)
from 2018 to 2021, which serves as an indicator of inflation:

● The NCPI shows a gradual increase from 2018 to 2019, suggesting a rise in
inflation.
● There is a notable dip in 2020, possibly due to economic impacts related to
the COVID-19 pandemic.
● In 2021, the NCPI rises again, indicating an increase in inflation rates.
Debt to GDP Ratio

The graph illustrates the trend of Sri Lanka's external debt to GDP ratio from 1960 to
2020. It shows significant fluctuations over these decades:

● In the early years, the ratio was relatively moderate, reflecting manageable
levels of external debt.
● The ratio peaked at about 70% in the early 1990s, a substantial increase likely
due to various economic factors and policy decisions.
● Following a decline to around 40% by the end of the civil war, there was a
continuous increase, reaching 61% in 2019 and approximately 66% in 2020.
 From the Economist’s Len’s View
Let us understand what it means and what are the Impacts in economic sense

Economic Indicator Description Why It's Bad for the Economy

Fluctuating GDP growth indicates economic

Fluctuating GDP growth instability. Rising NCPI (inflation) erodes

GDP Growth and NCPI
and rising NCPI purchasing power and can lead to economic

uncertainty.

Reduced tourism and exports weaken the

Merchandise Exports, Decline in tourism and
balance of payments. Fluctuating remittances
Tourist Receipts, and fluctuating exports and
affect foreign currency reserves and
Remittances remittances
household incomes.

Lower remittances reduce foreign currency

Migrant Worker Decline in remittances in
inflows, affecting the balance of payments and
Remittances (2018-2021) 2021
reducing households' spending power.

A sharp fall in investment can stifle economic

Total Envisaged Drastic decline in
growth, reduce job creation, and lower future
Investment (2018-2021) investment in 2021
productivity and income levels.

Depreciation of the currency can lead to

Official Exchange Rate Significant depreciation of
inflation, increase the cost of imports, and
Trend the LKR
decrease investor confidence.

High inflation diminishes the value of money,

Inflation (NCPI Trend) Rising inflation rate reduces real income, and can lead to

economic instability.
 A high debt-to-GDP ratio indicates a heavy

Increasing external debt debt burden, leading to higher interest

Debt to GDP Ratio
relative to GDP payments and reduced fiscal space for

development and social spending.

What it Means for the People

● Economic Uncertainty: The sovereign debt crisis creates economic

uncertainty among the people, leading to concerns about job security, income
stability, and future economic prospects.
● Impact on Standard of Living: High levels of sovereign debt can lead to
austerity measures, such as cuts in public services and social welfare
programs. This can directly affect the standard of living of the people, making
it harder to access essential services and support.
● Higher Taxes and Reduced Government Spending: To manage the debt
burden, the government may resort to increasing taxes or reducing spending
on public services. This can result in higher taxes for individuals and
businesses, as well as reduced access to healthcare, education, and
infrastructure.
● Inflation and Currency Depreciation: Sovereign debt crises often lead to
inflationary pressures and currency depreciation. This can erode the
purchasing power of the people, making imported goods more expensive and
reducing the value of their savings and investments.
● Impact on Employment: High levels of sovereign debt can hinder economic
growth and investment, leading to a slowdown in job creation and potentially
higher unemployment rates. This can have a direct impact on the livelihoods
of individuals and families.
● Social Unrest and Political Instability: Economic hardships resulting from a
sovereign debt crisis can lead to social unrest and political instability. People
may become disillusioned with the government's ability to manage the
economy, leading to protests and demonstrations.
Comparison and Learning from other Economies

Sri Lanka's debt crisis can potentially learn from the experiences of other countries that have

faced similar challenges. Here are a few key lessons and strategies that have been employed by

other nations to manage and overcome their debt crises:

● Debt Restructuring: Countries like Greece and Argentina have gone through debt
restructuring processes. This involves negotiating with creditors to extend maturity
dates, reduce the interest rate, or sometimes even write off a portion of the debt. Sri
Lanka could explore similar negotiations to make its debt obligations more manageable.
● Engaging with International Monetary Institutions: The International Monetary Fund (IMF)
has often played a crucial role in helping countries manage their debt crises. By engaging
with the IMF, countries like Jamaica and Portugal have received financial support and
technical assistance in exchange for implementing economic reforms.
● Economic Reforms and Austerity Measures: Implementing economic reforms to increase
revenue and reduce expenditure is a common approach. Latvia and Ireland, after the
2008 financial crisis, adopted austerity measures to stabilize their economies. Sri Lanka
might need to consider similar reforms to improve its fiscal situation.
● Diversifying the Economy: Countries that have successfully diversified their economies
have been better able to manage debt. For instance, Botswana transformed from being
heavily reliant on diamond mining to developing other sectors like tourism and financial
services. Sri Lanka could explore diversifying its economic base beyond traditional
sectors.
● Strengthening Legal and Regulatory Frameworks: Implementing strong legal and
regulatory frameworks can help manage debt more effectively. This includes improving
debt management offices, enhancing transparency, and ensuring responsible borrowing
practices.
● Social Protection Mechanisms: It's important to balance austerity measures with social
protections. Countries like Iceland and Malaysia have managed to implement economic
reforms while protecting the most vulnerable segments of their populations from the
brunt of these changes.
● Leveraging Bilateral and Multilateral Relations: Engaging with other countries and
international organizations for support and debt relief can be crucial. Countries like
Pakistan have benefited from bilateral aid and debt relief from allies and international
partners.
● Building Foreign Reserves and Stabilizing Currency: Countries like South Korea and
Thailand, post the Asian Financial Crisis, focused on building up foreign reserves and
stabilizing their currencies, which helped in managing their debt more effectively.

Each of these strategies comes with its own set of challenges and prerequisites, and the

applicability and success of each strategy can vary based on a country's specific economic,

political, and social context. Therefore, while Sri Lanka can learn from these examples, any

strategy it adopts must be tailored to its unique circumstances.

Conclusion

In conclusion, the future outlook for Sri Lanka, particularly concerning its debt
crisis, hinges on several key factors and strategic decisions. The path forward
involves a multifaceted approach, combining economic, political, and social
strategies.

The future outlook for Sri Lanka, therefore, involves navigating a complex landscape
of economic restructuring, political stabilization, and social change. The success of
these efforts will not only depend on the strategies adopted by the government but
also on the cooperation of international partners and the resilience of the Sri Lankan
people. While challenges are significant, with careful planning and execution, there is
potential for Sri Lanka to emerge from this crisis with a more stable and diversified
economy.