Emergency in Sri Lanka! | Economic Crisis Explained | Dhruv Rathee

Hello, friends! State of Emergency has been declared in Sri Lanka. Social media websites have been banned. And a curfew has been declared across the island. Before this, thousands of people were out on the streets protesting. There's a scarcity of fuel and food in the country. People are enraged. And Sri Lanka is going through a major economic crisis. What are the reasons behind this? Come, let's try to understand. "The situation in Sri Lanka is very bad. Along with the Emergency, they've imposed a 36-hour police curfew. In addition to the food shortages, people have to suffer through petrol and diesel scarcity too." "The enraged people in Sri Lanka, tried to attack the President's residence." "There, they were met with water cannons and tear gas." "They are the people who can actually do something, but they just leave the country. But now, it's enough!" First, let's understand the situation in Sri Lanka right now.

In February, Sri Lanka's foreign currency reserves, were at a mere $2.3 billion. Compared to January 2020, It had fallen below 70%. If a country has a low foreign currency reserve, it is difficult for it to import goods. With the present level of foreign currency reserve in Sri Lanka, it can import goods to meet one month's needs only. Apart from this, there is a debt payment of $4 million due from Sri Lanka. In India, we think of imported goods as luxury items, imported phones, imported laptops, imported cars, but friends, Sri Lanka's economy, relies on imported goods even for basic products. Sugar, cereals, pharmaceuticals. Thankfully, India and India's economy is so large, that these basic products are produced in India, and we can import it from different states, we don't have to import these from other countries.

But Sri Lanka has to import these from other countries. Because of the low foreign currency reserve, it is becoming increasingly difficult to import these. Leading to rapid inflation in the prices of these basic commodities in the country. There's high inflation. In the last month alone, Sri Lanka witnessed 25% inflation. People are facing difficulties to purchase even the basic things. Rice, sugar, milk. A Sri Lankan activist told The Indian Express, that the price of rice in Sri Lanka can reach up to 500 LKR within the week. LKR = Sri Lankan Rupees. 1 INR = 4 LKR approximately. Today, rice is at LKR 290/kg. Sugar: LKR 290/kg. Milk powder: LKR 790 for 400 grams. In some restaurants, a cup of tea now costs LKR 100. A Sri Lankan school teacher has said, they are a family of 3. Their family's monthly expenses used to be LKR 30,000 per month. But last month, their expenses were at LKR 83,000. There's a milk powder shortage too. It is becoming difficult for people to afford rice and lentils. On top of it, there's an electricity problem, a power crisis too. Because fuel is also imported from other countries.

People are getting electricity for only 4 hours a day. There are so many power cuts, the Power Minister of Sri Lanka has directed the officials to turn off the street lights to save power. The government ordered their electricity board, to get diesel from the Sri Lankan branch of Indian Oil Corporation, the Lankan Indian Oil Corporation. LIOC has given 6,000 MT of diesel to Sri Lanka, so that there is some relief in the situation. Cooking gas is supplied only once a week. And the price of a gas cylinder, went up from LKR 3,000 to LKR 4,200. It is around ₹1,200. There are long queues outside fuel stations. It has affected the newspaper and printing industries too. Newspapers have to minimise their prints. Because of the shortage in printing materials. School exams have been postponed. Due to this severe food and economic crisis, people have started fleeing the country. The first set of six refugees was found on an island near Rameshwaram.

They said that they had paid LKR 50,000 to the fisherman, to drop them off on an island in the Indian waters. These six refugees are a young couple, their 4-month old baby, another woman, with her 2 children. They were rescued by the Indian coast guard, and were fed in the coast guard camp. Later, they were handed over to the police, who then took them to a refugee camp. Then there was another group of 10 refugees. They said that they had spent LKR 300,000, so that they could flee their country and reach India safely. You can see how desperate the people are. According to the intelligence officers of Tamil Nadu, 2,000 refugees may come to India in the next few weeks. To discuss this, Tamil Nadu's Chief Minister MK Stalin, met Prime Minister Modi, asked permission to allow the State Government that the Sri Lankan Tamils that would come to Tamil Nadu as refugees, can be given humanitarian aid by the State Government. India is supporting Sri Lanka in other ways as well. On 17th March, Sri Lanka's Finance Minister signed a Credit Line of $1 billion with New Delhi.

Earlier in the year, a $500 million credit line was signed for fuel purchases. India did a currency swap of $400 million. And now, Sri Lanka is requesting another credit line of $1 billion from India. So that they can import basic items for their country, and the situation could be controlled a bit. But India is not the only country, from whom Sri Lanka has asked for help. They approached China for help too. Sri Lanka is deep in China's debt.

Sri Lanka had to make several debt repayments to China. Sri Lanka has requested China to restructure the debts. Along with it, they are discussing a $2.5 billion credit line from China. There have been discussions with IMF and the World Bank too, Sri Lanka's President will go to Washington DC next month, so that they could work out a rescue plan. To save the country. The biggest question here is that Why did this happen? What are the reasons that Sri Lanka's condition is this now? Friends, there are multiple reasons for this. In 2018, Sri Lanka was one of the world's top destinations for tourism. Hundreds of thousands of foreign tourists visited this country. Specifically speaking, 2018 was a record-breaking year for Sri Lanka. 2.3 million foreign tourists visited Sri Lanka. About 12% to 13% of Sri Lanka's economy, relied on tourism. Then in April 2019, there were multiple bombings in the country. Now known as the Easter Day Bombings. Three churches and three hotels were targeted across several cities, 269 people were killed in the bombings, 45 of them were foreign nationals. So you can imagine why this one day wrecked tourism.

8 suicide bombers were responsible for the bombings. Sri Lankan citizens, associated with a local Islamic terrorist group. Due to this, the following month, there was a large scale anti-Muslim violence in Sri Lanka. Homes, shops, cars of Muslims were attacked, and vandalised. To control this, more than 100 troops were deployed in Negombo town. Curfews were imposed, the government blocked Facebook and WhatsApp, to stop the rumours. But doing so only heightened the religious tensions. There were anti-Muslim riots in 2018 too in Kandy and Ampara. The government had to impose a State of Emergency in Sri Lanka then as well. They had blocked Facebook then too. It was found that Sinhalese Buddhist terror groups were responsible for the attacks. Later, when the Facebook Papers were leaked, it was revealed that Facebook had played a huge role in these riots.

Apps like Facebook constantly encouraged communal propaganda, their algorithm spread it far and wide, creating hatred among people and eventually, these riots broke out. If you're wondering how it was possible how social media apps instigate these riots, because it seems unbelievable. Then, friends, I'd recommend that you watch this video on social media, I'll link to it in the description, watch it after you've watched this video.

In it, I have explained it in detail, how Facebook spread hatred among people all across the world. In fact, Facebook had later apologised for these riots in Sri Lanka. All of these had a terrible effect on tourism. But, it was only the beginning. After this, in March 2020, the Covid-19 pandemic struck. Shutting down tourism all around the world. As I told you, 12%-13% of the country's economy relied on tourism. The entire sector collapsed. But even a collapse in tourism shouldn't be able to cause this much damage. There are more reasons. The Government made mistakes too. The Sri Lankan President, Gotabaya Rajapaksa, won the election in 2019 and came into power. In his presidential campaign, he had promised to revive the economic growth in the country. Another promise was to cut down the Value Added Tax, VAT, to half.

VAT used to be charged at 15% before this. The simple reason for the tax cut was that if people paid less tax, they would spend more. With the increase in consumption,
there would be economic growth. There's nothing wrong with the logic. This worked out successfully in many instances. But it needs to be executed with the right timing. With the right planning. After understanding the situation. This tax cut came into effect on 1st December 2019. 3 months later, the Covid-19 pandemic hit. The logic was that people would consume more with a reduction in tax, But with the lockdown, and people unable to go out to consume things, there was no increase in consumption.

There was no increase in consumption
and none in economic growth either. And the government had to incur a huge revenue loss. Sri Lanka's public debt kept on increasing. In 2019, the debt was 94% of GDP. By 2021, it had gone up to 119% of GDP. Their President came up with a "Masterstroke" too. In the 2019 elections, he had promised that he would convert the country's agriculture into organic. In his campaign, he spoke about how, over 10 years, he would shift agriculture to 100% organic. And then he came up with the sudden decision. Overnight, there was a nationwide ban on synthetic fertilisers and pesticides. He wanted the country to overnight become a country that practices 100% organic agriculture.

There was another reason to make this decision, to cut down imports. Synthetic fertilisers and pesticides were imported into the country. The government thought to save some money by banning imports of these. Such decisions are lauded as bold by the fans of some politicians. A sudden, major disruption, must be good. But these sudden, bold decisions, are often without much thought. True change in the country happens slowly and with planning. The thing about organic food, it is good for the environment, for our health, it is more sustainable, but when it comes to organic farming, its short-term efficiency isn't good.

It's said that in the short term, the produce may fall by 20% to 30%. Because of not using fertilisers and pesticides. This is what happened exactly. Sri Lanka was a country that was self-sufficient in rice production. Rice didn't have to be imported. But after the ban, within 6 months, the government had to spend $450 million to import rice. There was a large tea production in Sri Lanka, and the tea used to be exported to other countries. A major source of foreign currency for the government was the tea export. The ban destroyed the tea crop too. After listening to this, you shouldn't be thinking that switching to organic farming is the wrong decision. Organic farming is definitely better for your health, better for the environment, but any decision, irrespective of how good the intention behind it was, if it is made without thinking it through without planning for it, it would lead to such a catastrophic result.

Here, I'd like to use Sikkim as an example. In India, Sikkim is a 100% organic state. Sikkim transitioned into being 100% after long deliberation. They began in 2003. And in 2016, they had declared that Sikkim had become a 100% organic state. In the short term, their production capacity dropped in some areas, but in the long-term, it is seen that there isn't s significant difference in the production. In fact, this gave a boost to Sikkim's tourism too. But we can discuss this later in detail, in some other video, how it was for Sikkim to transition to organic farming. The way it became possible.

Another reason behind Sri Lanka's economic crisis is the Food Mafia. The government claims that the food mafia is hoarding the food, there's a black market for even the basic items. Rice, sugar and pulses. And then comes the final reason, Foreign Debt. This isn't a new problem. This has always been a problem for Sri Lanka historically, it's been going on for years. In 2017, Sri Lanka's total debt was $64 billion. 95% of the government revenue, went to debt repayment.

In 2020, the debt was at $51 billion, and Sri Lanka imposed an import ban on foreign currency to repay this debt. China is also blamed for this. It's said that China is using debt-trap diplomacy. China lends billions of dollars to countries so that they could fund, big infrastructure projects for highways, ports, airports to build power plants, and when the other country can't profit out of it, when they can't repay the debt, China then confiscates the project. Chinese companies take over. A major example of this is the Hambantota International Port, Sri Lanka. It was built in November 2010, at the cost of $1.3 billion. With a loan from China. But this port had to suffer huge losses. And Sri Lanka could not repay the debt. That's why the new government decided that 80% of the stake of the port would be privatised. Sold off to private companies. After the bidding, which company bought the stakes in the port? A Chinese company named China Merchants Port.

After the negotiations, in July 2017, this agreement was finally signed. 70% of the stake was sold to China Merchants Port. Additionally, this port was leased out to this company on a 99-year-lease. In exchange, Sri Lanka received $1.2 billion in foreign currency. Many critics and opposition politicians had opposed this. Asking the government to stop selling the country. Due to these reasons friends, the value of the Sri Lankan rupee is deteriorating rapidly. At the beginning of March, $1 was approximately about LKR 200. Now, the conversion rate has dropped to $1 being about LKR 300. Because the value of their currency is falling, everything that they import, are becoming more and more expensive. This, in turn, causes more inflation. The latest update on the situation is that all the ministers in the Sri Lankan government have resigned. All the 26 ministers in the government, have submitted their Letter of Resignation to the Prime Minister. But their Prime Minister, Mahinda Rajapaksa, and his brother, the President of the country, against whom people are protesting out on the streets, neither of them has resigned.

People are furious, people are coming out on the streets to defy the curfew. I hope that the credit line being given to Sri Lanka, would help Sri Lanka to make a successful recovery. and would be able to bring its economy back on track. For any country, crisis and instability is obviously bad for its citizens, but it leaves an impact on the neighbouring countries too.

If the situation in Sri Lanka continues to worsen, there will be more refugees in India. There may be several effects of this on India as well. I would like to thank KUVERA for sponsoring this video. It is a brilliant app for mutual funds. Simply set your goal, whether it is a new house or a new car, the algorithm of the app will tell you which mutual fund would be the best for you to invest your money in. There's a special feature on KUVERA. The Group Health Insurance. This is exclusively for KUVERA users, with this, in any medical emergency, you can get top-class treatment in the country for your family absolutely cashless. There is no co-payment in the Group Health Policy, no room-capping or any capping on any treatment, and it has the lowest waiting period for pre-existing illnesses. So if you're a KUVERA user, do take advantage of this. The link to it is in the description below.

If you want to know, the impact of currency exchange rate on a country's economy, I would ask you to watch this video, titled $1 = ₹1. In it, I explained what would have happened had $1 been equal to ₹1. Its impact on the Indian economy. It's very interesting. Click here to watch it. Thank you very much!.

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