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Why and What Happened to Sri Lanka’s Economy

Is the Sri Lankan crisis a 'man-made' problem, did someone ignored the warning signs.

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The ongoing crisis in Sri Lanka, which is the worst in the country’s history, is a man-made problem while warning signs visible for a year were ignored, said Professor Mick Moore, a highly acclaimed political economist and professorial fellow at the Institute of Development Studies at the University of Sussex.

In an interview with Amsterdam based think tank European Foundation for South Asian Studies (EFSAS) last week, Moore said the Sri Lankan economic crisis is almost entirely caused by government decisions that were extremely unwise.

Moore in the interview analysed the prevailing political and economic situation in Sri Lanka and the possible trajectories in the coming months.

Professor Moore suggested that the current economic conditions in Sri Lanka translate into the country’s worst economic crisis in recorded history and that this crisis, although exacerbated by falling tourism revenues due to COVID-19 travel restrictions and rising food and fuel prices, was caused almost entirely by unwise policy decisions made by the Rajapaksa administration.

Professor Moore outlined that a rapid decrease in national foreign exchange reserves has created major restrictions on the availability of imported everyday goods, creating fuel, energy, food, and medicine shortages.

The decrease in foreign exchange reserves has come as the result of the government taking on a growing number of loans in foreign currencies without being financially capable of servicing the debt, according to the Professor.

Moore highlighted that this growing payment pressure has not been sprung on the Rajapaksa government suddenly, as it was already evident for more than a year that the national foreign exchange reserves would run out soon, and response to this looming balance of payments crisis robbed the country of its valuable negotiation time.

Most of the acquired debt has been accumulated due to the government taking out significant loans to fund domestic infrastructure projects that were politically popular, which practically reinforced rent-seeking behaviour and patronage networks, while economically they made very less sense.

Domestically, Professor Moore pointed out, the Rajapaksas, who have inserted several family members into key political positions, have enjoyed significant support due to their role in the civil war. This base of popular support, however, has been rapidly eroded by economic and financial mismanagement and the Rajapaksa’s assumption that the family could push through any kind of policy.

When discussing the role of Chinese investments in infrastructure and their alleged contribution to the economic and political crisis in the country, Moore stated that it is important to mention that China is not the only funding body in those projects and thus the responsibility for the status quo is shared together with other actors.

According to him, the current unfavourable circumstances are the result of debt accumulation, policy missteps and ill-conceived infrastructure projects built with Chinese funds.

Professor Moore further explained how given the geostrategic importance of Sri Lanka, the competition for economic and political influence on behalf of foreign actors is inevitable; hence, the involvement of China is not isolated.

Answering a question on long-term structural reforms, Professor Moore argued that the long-term economic outlook for Sri Lanka is not at all bleak, as the country has benefited greatly from Asia’s economic growth, and there are new economic activities emerging.

When it comes to the fiscal crisis, he said one conceivable solution would be to reverse the recent changes made by the government regarding the tax cut.


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