by Vinod Kripalani, January 21, 2023
How the Rajapaksa Administration’s Poor Trade, Fiscal, and Monetary Policies Led Sri Lanka Into a Severe Economic Crisis
by Vinod Kripalani, October 4, 2022
The recent Sri Lankan crisis is one of the biggest corruption scandals in the world with the Rajapaksa family inappropriately using tax-payers’ money, resulting in a severe economic crisis that caused Sri Lanka to go bankrupt and the general population unable to afford basic necessities (Koop). The Rajapaksas are a family who have been involved in Sri Lankan politics since the 1950s. In Sri Lanka, they were known as saviors for their efforts in ending the three decade civil war in 2009 (Sirilal and Aneez).
Corruption is not the only contributing factor to Sri Lanka’s current condition. Citizens have been victims of economic hardship due to financial corruption and inflation. Sri Lanka’s hardships are also due to poor trade and fiscal policies that can be traced back more than 10 years ago (Koop). In 2009, Sri Lanka was fresh out of a civil war. Then current president Mahinda Rajapaksa wanted the country to be more economically developed and encouraged Sri Lankan companies to increase domestic production and lower exports (Koop). This caused Sri Lanka’s trade deficit to increase to 123 million USD in July 2022 (“Sri Lanka…”).
To combat the ongoing crisis, one potential solution is to have Sri Lanka adopt a system of progressive tax, which is now required for Sri Lanka to do according to their new agreement with the International Monetary Fund (IMF) (Jayasinghe). This has also been recommended by the US Senate Foreign Relations Committee (Jayasinghe). Put simply, progressive tax involves taxing the rich more heavily than the poor (“Progressive…”). One of the biggest revamps in this deal with the IMF is a major reconstruction of the central bank, which is responsible for Sri Lanka’s monetary policy (Jayasinghe).
The crisis in Sri Lanka gives other states a warning to revisit and potentially revise trade, fiscal, and monetary policy, as well as measures to curb corruption. A state that should heed this advice is Pakistan. Currently, Pakistan is in a severe debt deficit due to similar trade policies that Sri Lanka utilized (Peshimam).
Sirilal, Ranga, and Shihar Aneez. “Sri Lanka’s President Wins Victory in Native South.” Reuters, 11 Oct. 2009, www.reuters.com/article/idINIndia-43071820091011.
“Sri Lanka Balance of Trade – September 2022 Data – 2002-2021 Historical.” Tradingeconomics.com, tradingeconomics.com/sri-lanka/balance-of-trade#:~:text=Narrows%20in%20July-. Accessed 2 Oct. 2022.
Jayasinghe, Uditha. “Sri Lanka Gains IMF’s Provisional Agreement for $2.9 Bln Loan.” Reuters, 1 Sept. 2022, www.reuters.com/world/asia-pacific/sri-lanka-imf-reach-preliminary-agreement-29-billion-loan-2022-09-01/.
“Progressive Tax | What Is a Progressive Tax?” Tax Foundation, taxfoundation.org/tax-basics/progressive-tax/#:~:text=A%20progressive%20tax%20is%20one.
Peshimam, Gibran Naiyyar. “Explainer: How Worried Should We Be about Pakistan’s Economy?” Reuters, 30 Sept. 2022, http://www.reuters.com/markets/asia/how-worried-should-we-be-about-pakistans-economy-2022-09-30/. Accessed 2 Oct. 2022.