Like India, Sri Lanka was also a former British Colony which got its independence in 1948. The economic condition of Sri Lanka was much better than in India at that time. The first twenty years after independence were good in terms of economy. But today, things are much different. Sri Lanka is on the verge of economic collapse. Here are some of the reasons behind the downfall of the Sri Lankan economy.
Blindly following the parameters set by international organizations and the US economic model
In 1970, armed rebellions started in Sri Lanka against their socialist government. Till then, Sri Lanka used to have a pro-soviet union government. But in 1977, Sri Lanka faced a significant political change when the right-wing pro-US government came into power. Sri Lanka started shifting to economic liberalization from the socialist economic model. Sri Lanka became the first country in South Asia to open its economy to the world in 1970.
In comparison, this process took place in China and India in the 1980s and 1990s, respectively. India and China never followed the parameters set up by international agencies and the American economic model. On the contrary, Sri Lanka followed the path shown by international organizations. It made Sri Lanka open its economy to the world market. Top companies started coming to Sri Lanka, which made domestic industries of Sri Lanka remain undeveloped. Domestic industries had neither enough money nor did they had advanced technologies to compete against modern international companies. In addition to this, industries were deregulated, and government property was privatized rapidly overnight. In contrast, China and India gradually opened their economies to the world. As a result, domestic industries got enough time to grow. Sri Lanka had to depend on other countries, and their imports increased. As a result, their currency went on weakening.
High interest lending policies of International organizations
Sri Lanka found it difficult to obey the policies defined by international organizations. In the meantime, IMF offered them a loan. Sri Lanka went on taking loans, and its currency kept weakening.
Civil war in Sri Lanka
Another reason for Sri Lanka's downfall was that, unlike India, Sri Lanka treated its Tamil minorities very poorly. And the result was a civil war that lasted more than 25 years. It affected the economy and currency of Sri Lanka.
Sri Lanka economy was still stuck on the export of colonial era and tourism sector
Due to the lack of a robust domestic market in Sri Lanka, the economy was still dependent on two major things. First was the export of three items tea, rubber and garments. And second was its tourism sector. In the last ten years, the prices of the above-mentioned commodities fell drastically, resulting in less profit on the export of these items.
Along with this, the tourism sector was at its lowest level due to Covid-19 and the Russia-Ukraine conflict. Sri Lanka was one of the popular destinations among both Russian and Ukrainian tourists.
Policies of freebies
The freebie policies of Prime Minister Gotabaya Rajapaksa also caused enormous damage to the economy of Sri Lanka. He reduced the VAT taxes from 15 % to 8 %. In addition to this, he also abolished some minor taxes like the nation-building tax and the economic service charge. The indirect tax collection was reduced, and Sri Lanka faced a lot of problems in the payment of its exports.
Sudden shift of farming from chemical fertilizers towards organic fertilizers
The Prime Minister of Sri Lanka Gotabaya Rajapaksa decided to go with organic farming in 2021. Sri Lanka banned chemical fertilizers, and the production of crops got reduced. It resulted in a food crisis despite a good monsoon season.
Debt trap policies of China
After long years of civil war, the economy of Sri Lanka was devastated. During that time, China repeatedly saved Sri Lanka from its VETO in the United Nations Security Council(UNSC). The government of Sri Lanka felt that the Chinese government wanted to help them. But China started to take important places when Sri Lanka was unable to pay the loan back. Hambantota port of Sri Lanka is an example of this policy.