The Downfall of Sri Lankan Economy

sahil rahaman | Last updated: 17 June 2022

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Quick Summary

Sri Lanka, once a prosperous nation ahead of many Asian counterparts, has faced a severe economic downturn. This decline wasn't solely due to COVID-19 but stemmed from decades of issues including a massive increase in defence spending during the civil war, widespread nepotism and corruption, a lack of industry-relevant skills in its education system, and a failed mega-port project in Hambantota which led to significant debt. Furthermore, populist tax cuts before COVID-19 exacerbated the fiscal deficit, leaving the nation vulnerable when the pandemic hit the vital tourism sector.

Sri Lanka might be a small economy but it was not a poor country in the 1950s, even at Sri Lanka was much ahead of many Asian countries like India and China after its independence in 1977. Until the second half of the 1950s, the Sri Lankan economy enjoyed a trade surplus owing to rising primary comm

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FAQ :

No, in the 1950s, Sri Lanka enjoyed a trade surplus and was ahead of many Asian countries, using export revenues to fund free education and healthcare.

The civil war (1983-2009) caused a significant increase in the defence budget, rising from 6% to 21% of the national budget, which severely impacted the economy.

The Rajapaksa family's political strategy involved appeasing the Sinhalese majority, leading to the public overlooking significant nepotism and corruption within the government.

Sri Lanka borrowed heavily from China to build the Hambantota port, expecting high traffic. However, it received far fewer ships than anticipated, leading to an inability to repay the loan and China acquiring an 80% stake.

COVID-19 exacerbated existing economic weaknesses, particularly by devastating the tourism sector, which is a significant contributor to Sri Lanka's GDP. The economy was already struggling due to long-standing issues.

Before COVID-19, populist decisions like reducing VAT from 15% to 8% significantly halved tax collection, increasing the fiscal deficit and weakening the economy's financial standing.