Sri Lanka in historic economic disorder.

Byline: NAZIR AHMED SHAIKH

Tuesday, April 12, 2022 was a black day in the history of the island nation Sri Lanka, as they defaulted on its $51 billion foreign debt. This move has been increasingly expected by international markets, particularly in recent months. It is Sri Lanka's first default since its independence in 1948.

The country's 22 million population is facing crippling 12-hour power cuts, and an extreme scarcity of food, fuel and other essential items such as medicines, as its foreign currency reserves dwindled. Normally, most countries keep foreign currencies in reserves for making payments for these items, but the mismanaging invited a shortage of foreign exchange creating havoc and resulting in sky-high prices.

Currently, inflation is at an all-time high which is 17.5%. The prices of food items such as a kilogram of rice soared to 500 Sri Lankan rupees when it would normally cost around 80 rupees. Amid shortages, one 400g packet of milk powder is reported to cost over 250 rupees, when it usually costs around 60 rupees. This was happening after decades of strong performance on social indicators, which are now at serious risk. From the 1950s to the 1980s, robust tax revenues supported generous subsidies for food, healthcare, and education.

Sri Lanka consistently outperformed its international peers on social indicators. However, from the 1990s, the nation's tax-to-GDP ratio has declined, from an average of 18.4% in 1990-92 to 12.7% percent in 2017-19 and a low of 8.4 percent in 2020. Surprisingly, the decline in revenues started after Sri Lanka's civil war, which ended in 2009. Governments began spending substantially less on social goods than they had in the past, with average health and education spending in 2010-19 amounting to 1.8 percent and 1.4 percent of GDP, respectively.

Sri Lanka's current economic trajectory was predictable, and its impending sovereign default a foregone conclusion. High external debt repayments, a foreign exchange crisis, and above all COVID pandemic push the country to the brink of this unprecedented default. Domestic authorities, including the governor of the central bank, have resisted growing national and international calls for an IMF agreement and debt restructuring, insisting that Sri Lanka will service its debt and keep the interests of foreign creditors at heart.

After 1990, the consecutive Sri Lankan governments had made back-to-back three blunders. Firstly, they have substantially depended...