Best remedy for the economic crisis | Sunday Observer
Foreign investments and exports

Best remedy for the economic crisis

2 January, 2022

It is no secret that the Government is facing the most dreadful economic situation the country has confronted since its independence. Although the country has encountered similar circumstances several times previously, the magnitude of the current economic constriction supersedes all of them according to economists.

The Government keeps on saying that the reason for the current dire strait is due to the exorbitant expenditure incurred on the Covid-19 pandemic-related health programs and related social welfare concessions granted to the general public. Undeniably, the unanticipated huge amount of public funds disbursement on pandemic prevention has had an enormous influence on the current troublesome economic situation.


The Government declared that it has already spent approximately a staggering 260 billion rupees on medicine, quarantine facilities, PCR tests, and various related social welfare projects since the breakout in January 2020. Even though the figure is unconfirmed, everyone can guess that the Government has spent a colossal amount on the gruesome health catastrophe.

In fairness, the Government and other relevant stakeholders were immensely successful in controlling the pandemic. Sri Lanka is recognised as one of the most successful countries on the vaccination drive.

However, pandemic control is not the only responsibility of a Government. There are many other critical issues that must be addressed by the Government on public day-to-day existence. The Government must take control of many ongoing issues as soon as possible and not allow the situation to deteriorate further.

Even before the emergence of Covid-19, the economy was on a downward trend, particularly from 2015 to 2019, without any considerable and justifiable reason. During the entire period of the so-called ‘Yahapalana’ regime, the GDP growth declined drastically.

The growth rate that was recorded as 5.01 percent in 2015 was down to 2.26 percent in 2019 when the incumbent president took office. Regrettably, due to the effects of the Covid-19 across the globe, the GDP rate was dropped to minus 3.57 percent, although the predictions for 2021 show around a positive 3 percent as per econometrics.

In reality, not only Sri Lanka is a victim of the pandemic; even the richest countries were affected drastically by the impact of Covid-19, depriving middle-income countries such as Sri Lanka of their usual trade opportunities. The economies of Sri Lanka’s trade partners such as the United States, European countries, and even some of the Asian countries have recorded a minus growth rate in 2020.


Undoubtedly, the biggest threat to the country at present is posed by the drastic reduction of external finances. Foreign reserves were dropped down to US$ 1.6 billion by the end of November. According to some economists, the amount is only sufficient to import essential commodities for a few more weeks. However, at the time of writing this article, the Governor of the Central Bank has made a confident public statement that by end of the year; the foreign reserves will move up to US$ 3.0 billion. This is a consolation to the country although it’s a temporary solution.

The biggest issue faced by consecutive Governments is the ever-escalating trade deficit. Sri Lanka has a mixed economy in which both the state and the private sector engage in production. However, the trade deficit kept going up due to the import of both essentials and non-essential goods, without a proper regulatory mechanism since 1978.

Throughout the past several decades, the balance of trade was unmanageably high as the country was dependent heavily on imports. Unwanted no-essential goods were imported arbitrarily inflicting irreparable harm to local industries. Regardless of the alarming scarcity of foreign reserves, media reports reveal that some of these non-essential goods are being imported even at this moment. As the country’s exports are nowhere near bridging the gap in the current account deficit, the only short-term solution available to the Government is to borrow.


Rubbing salt into the wound, the country is currently facing a severe borrowing crisis due to the downgrading of the US credit rating agency Fitch Rating recently. Fitch has downgraded Sri Lanka’s Long-Term Issuer Default Rating (IDR) to CC from CCC. Earlier even the rating agency Moody’s downgraded the debt rating to Caa 2. Both agencies state that Sri Lanka has not come up with a comprehensive debt repayment plan.

In response, the Central Bank of Sri Lanka states that the decision was made hastily without recognising the positive developments taking place in the country at present. However, such statements are not going to make any difference to the stance of Fitch and Moody’s ratings or make any impact on the standpoint of lending countries or institutions.

The only consolation to the country is at this point is the commendably powerful export performance in 2021, despite all odds. According to sources, Sri Lanka’s overall export earnings stand at US$ 11.1 billion during the first eleven months of 2021 ( January-November). This is an extremely creditable growth of 22 percent compared to the corresponding period of 2020. Almost all sectors in exports have performed exceedingly well, with apparel exports being the highest contributor.

The huge decrease in remittances from expatriate workers is a major headache for the Government. These remittances were the largest foreign revenue earner for the country, with approximately US$ 7.1 billion annually, for a long period. Due to the ongoing US dollar-SL rupee debacle, the expatriate employees show increasing reluctance to remit their earnings through conventional methods.

Since August this year remittances started to fall as the official rate remained around Rs. 200/- to a US Dollar while the after-hours street market rate has hit Rs. 240/- to the US Dollars. Quite naturally, instead of standard banking methods, they are rapidly turning towards illegal methods such as ‘Undial’ and ‘Hawala’ money transfer systems.

The predicted estimate for the year 2021 based on last year’s amount of foreign remittance stood at approximately US$ 7 billion this year. However, the CBSL stated that the estimated figure was dropped down to drastic levels. The CBSL decision to pay extra ten rupees for a US Dollar also has failed as the amount offered was inadequate.


A number of economists publicly announce that the best remedy at this time is to allow the exchange rate to float. Most experts predict that the foreign remittances from expatriate employees will stop using illegal money transfers and switch back to official systems if the Central Bank lets the rupee fluctuate in value according to market expectations.

The foreign exchange earnings from tourism were completely cut off for two years creating another hefty gap in foreign currency earnings. The peak revenue recorded in 2018 was US$ 4.7 billion and even with the Easter Sunday debacle, the revenue stood at a creditable US$ 3.7 billion in 2019. As the income of tourism is derived as a service, the major portion of the revenue from tourism is retained in the country, unlike the apparel industry where part of the revenue is spent on imports of raw materials and accessories.

To settle foreign loan installments due in January and July 2022 and to import essential commodities such as fuel, food, medicine, and so on, the Government has introduced capital controls, limiting outgoing foreign currency. However, the majority of specialists in economics suggest that the government must turn to the International Monetary Fund (IMF) to uphold foreign exchange reserves, despite the resistance of a section of politicians.

The opinion is clearly divided as yet. According to the Central Bank sources, the Government still can manage the crisis without borrowing from the IMF. A segment of economists and business leaders are of the opinion that the conditions laid down by the IMF when offering a loan are not harmful to the country.

Whatever method the Government ultimately uses to strengthen the foreign reserves, is only a temporary measure. Simply, the debt pile accumulates until a medium and long-term solution to lure foreign revenue is developed immediately.

Drawing foreign investments and encouraging exports are the two immediate remedies the experts suggest.

To attract foreign investors, the business environment must be investor-friendly. To create such a business-friendly environment, political consensus is an absolute necessity.

However, in Sri Lanka, habitually, whilst the Opposition looks at investors from an opportunistic political angle, the so-called left-wing parties traditionally see investors as enemies who attempt to rob the country.

Hence, it is time for the leadership to do away with popular choices and arrive at strong and even harsh decisions that are favourable to the country and the citizenry.