The Sri Lankan Economic Crisis – What Went Wrong?


Code : ECC0062

Year :

Industry :-

Region : Asia

Teaching Note: Available

Structured Assignment : Not Available

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Fiscal / Budget Deficit and Debt: The Asian Development Bank in 2019 described Sri Lanka’s economy as “a tale of two deficits” – Budget Deficit and Trade Deficit. In 2019, immediately after coming to power, President Gotabaya Rajapaksa (Rajapaksa) implemented his party’s election promises of big tax cuts. Later, in 2022, he admitted that tax cutting was a mistake..

Balance of Trade - Current Account Deficit: While increased government expenditure (Refer to Table I) from the year 2000 propped up the economic growth with increased GDP (Refer Table II) and per capita income, there was an increase in imports too. Growth in exports did not keep pace with the growth in imports..

Effect of Import Policy Measures on Sri Lankan Economy: In October 2018, the Sri Lankan government initiated some measures to control the current account deficit. These included margin deposit requirements for the import of motor vehicles and suspension of selected non-essential goods, providing protection to domestic industries, enactment of new anti-dumping laws, etc..

The Effect of External Shocks on Sri Lankan Economy: Tourism was the bedrock of the Lankan economy. The Easter Sunday blasts in April 2019 damaged Sri Lankan tourism and the earnings from tourism fell from 3606 USD mn in 2019 to 682 USD mn in 2020..

Exhibit I: Foreign Debt Stock in Sri Lanka as of 2019%
Exhibit II: Sri Lanka Foreign Exchange Reserves (USD mn.)

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