{"id":32327,"date":"2023-02-03T01:00:49","date_gmt":"2023-02-02T19:30:49","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=32327"},"modified":"2025-04-19T10:35:34","modified_gmt":"2025-04-19T05:05:34","slug":"sri-lankas-economic-crisis","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/sri-lankas-economic-crisis\/","title":{"rendered":"Sri Lanka\u2019s Economic Crisis"},"content":{"rendered":"<h3><strong>What\u2019s in today\u2019s article?<\/strong><\/h3>\n<ul>\n<li><strong>Why in News?\u00a0<\/strong><\/li>\n<li><strong>What is the Paris Club?\u00a0<\/strong><\/li>\n<li><strong>Brief Background on Economic Crisis in Sri Lanka<\/strong><\/li>\n<li><strong>Implications of the Economic Crisis in Sri Lanka<\/strong><\/li>\n<li><strong>IMF Bailout for Sri Lanka<\/strong><\/li>\n<li><strong>What is IMF?\u00a0<\/strong><\/li>\n<\/ul>\n<p><strong>\u00a0<\/strong><\/p>\n<h2><strong>Why in News?<\/strong>\u00a0\u00a0<\/h2>\n<ul>\n<li>The Paris Club, an informal group of creditor nations, will provide financial assurances to the International Monetary Fund on Sri Lanka\u2019s debt.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><strong>What is the Paris Club?<\/strong><\/h2>\n<ul>\n<li>The Paris Club is a group of mostly western creditor countries that grew from a 1956 meeting in which Argentina agreed to meet its public creditors in Paris.<\/li>\n<li><strong>Objective \u2013<\/strong> To find sustainable debt-relief solutions for countries that are unable to repay their bilateral loans.<\/li>\n<li>It is a <i><strong>forum where official creditors meet to solve payment difficulties faced by debtor countries<\/strong><\/i>.<\/li>\n<li><strong>Member Countries \u2013<\/strong> Australia, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Japan, Netherlands, Norway, Russia, South Korea, Spain, Sweden, Switzerland, the United Kingdom and the United States.\n<ul>\n<li>All <strong>22<\/strong> are members of the group are also part of the Organisation for Economic Co-operation and Development (OECD).<\/li>\n<\/ul>\n<\/li>\n<li>OECD is a group of 37 member countries that discuss and develop economic and social policy.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><strong>Brief Background on Economic Crisis in Sri Lanka<\/strong><\/h2>\n<p>&nbsp;<\/p>\n<p><img decoding=\"async\" src=\"https:\/\/lh6.googleusercontent.com\/FkBvJxrLHaIAaWJ91Ei-jWSb980h-lDCZjprD1yjc61EcKNmCNambETYN37-UGmKrhizh1w4Iuirz1lOvQMMlRMF1Frnd1Nk7JmGuJXH8wGGYsZT346luhQ4tosKLIa8ixWNVrntLx-BM89u0B5CoA\" alt=\"\" \/><\/p>\n<p>Image Caption: Sri Lanka\u2019s Economic Crisis<\/p>\n<ul>\n<li>Sri Lanka is currently in an economic and political crisis of mass proportions, recently culminating in a default on its debt payments.\u00a0<\/li>\n<li>There are several reasons for this crisis and the economic turmoil has sparked mass protests and violence across the country. Following is a brief timeline of events which eventually led to the crisis \u2013\u00a0\n<ul>\n<li><strong>2009 \u2013\u00a0<\/strong>\n<ul>\n<li>In 2009, a decades-long civil war in the country ended and the government\u2019s focus turned inward towards domestic production.\u00a0<\/li>\n<li>However, <strong>a stress on local production and sales, instead of exports, increased the reliance on foreign goods<\/strong>.<\/li>\n<\/ul>\n<\/li>\n<li><strong>2019 \u2013\u00a0<\/strong>\n<ul>\n<li>Unprompted cuts were introduced on income tax in 2019, leading to <strong>significant losses in government revenue<\/strong>, draining an already cash-strapped country.<\/li>\n<\/ul>\n<\/li>\n<li><strong>2021 \u2013\u00a0<\/strong>\n<ul>\n<li>The Sri Lankan government introduced a ban on foreign-made chemical fertilizers. The ban was meant to counter the depletion of the country\u2019s foreign currency reserves.<\/li>\n<li>However, <strong>with only local, organic fertilizers available to farmers, a massive crop failure occurred and Sri Lankans were subsequently forced to rely even more heavily on imports<\/strong>, further depleting reserves.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h3><strong>Implications of the Economic Crisis in Sri Lanka<\/strong><\/h3>\n<ul>\n<li>Sri Lanka is home to more than 22 million people who are rapidly losing the ability to purchase everyday goods.\u00a0<\/li>\n<li>The <strong>government owes $51 billion<\/strong> and is unable to make interest payments on its loans, let alone repay the amount borrowed.<\/li>\n<li>And its currency had collapsed by 80%, making imports more expensive and worsening inflation that is already out of control, with food costs rising 57% by May, 2022.<\/li>\n<li>Due to power outages meant to save energy and fuel, schools were shut down.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><strong>IMF Bailout for Sri Lanka<\/strong><\/h2>\n<ul>\n<li>In September 2022, International Monetary Fund (IMF) and the Sri Lankan authorities reached a staff-level agreement to support Sri Lanka&#8217;s economic policies with a 48-month arrangement under the Extended Fund Facility (EFF) of about <strong>US$2.9 billion<\/strong>.<\/li>\n<li>The objectives of Sri Lanka\u2019s new Fund-supported program are \u2013\u00a0\n<ul>\n<li><i>To restore macroeconomic stability and debt sustainability<\/i>,\u00a0<\/li>\n<\/ul>\n<\/li>\n<li><i>Stepping up structural reforms to address corruption vulnerabilities and unlock Sri Lanka\u2019s growth potential<\/i>.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><strong>What is IMF?\u00a0<\/strong><\/h2>\n<ul>\n<li>The IMF was originally created in 1945 as part of the <strong>Bretton Woods Agreement<\/strong>, which attempted to encourage international financial cooperation by introducing a system of convertible currencies at <strong>fixed exchange rates<\/strong>.\u00a0\n<ul>\n<li>The dollar was redeemable for gold at $35 per ounce at the time.<\/li>\n<\/ul>\n<\/li>\n<li>The planners wanted to avoid the trade barriers and high-interest rates that helped cause the Great Depression (1929).<\/li>\n<li><strong>Mission<\/strong>:\u00a0\n<ul>\n<li>Furthering international monetary cooperation,\u00a0<\/li>\n<li>Encouraging the expansion of trade and economic growth, and\u00a0<\/li>\n<li>Discouraging policies that would harm prosperity.<\/li>\n<\/ul>\n<\/li>\n<li>To fulfil these missions, IMF member countries work collaboratively with each other and with other international bodies.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<hr \/>\n<h3><strong>Q1) What is meant by Bretton Woods Agreement?<\/strong><\/h3>\n<p>The Bretton Woods Agreement <strong>established a system through which a fixed currency exchange rate could be created using gold as the universal standard<\/strong>. The agreement involved representatives from 44 nations and brought about the creation of the International Monetary Fund (IMF) and the World Bank.<\/p>\n<p>&nbsp;<\/p>\n<h3><strong>Q2) What is a Bailout?<\/strong><\/h3>\n<p>A bailout is <strong>the injection of money into a business or organization that would otherwise face imminent collapse<\/strong>. Bailouts can be in the form of loans, bonds, stocks, or cash. Some loans require reimbursement\u2014either with or without interest payments.<\/p>\n<p>&nbsp;<\/p>\n<hr \/>\n<p><strong>Source:\u00a0 <\/strong><a href=\"https:\/\/indianexpress.com\/article\/explained\/everyday-explainers\/imf-sri-lanka-debt-paris-club-meaning-8421521\/\" target=\"_blank\" rel=\"nofollow noopener\"><u>Paris Club likely to provide financial assurances to IMF on Sri Lanka debt<\/u><\/a>\u00a0 \u00a0<strong>|<\/strong>\u00a0 <a href=\"https:\/\/www.reuters.com\/markets\/asia\/paris-club-give-sri-lanka-financing-assurances-amid-imf-debt-talks-sources-2023-02-02\/\" target=\"_blank\" rel=\"nofollow noopener\"><u>Reuters<\/u><\/a>\u00a0\u00a0<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The Sri Lankan economic crisis is an ongoing crisis that started in 2019.<\/p>\n","protected":false},"author":5,"featured_media":32328,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[],"class_list":{"0":"post-32327","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/32327","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=32327"}],"version-history":[{"count":0,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/32327\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/32328"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=32327"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=32327"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=32327"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}