WHY SRI-LANKA IS
EXPERIENCING ECONOMIC CRISIS?
Sri Lankan economy has been facing with the shortages of the
foreign exchange currently and the major reasons of the economic slowdown in
Sri Lanka are:
1. Tourism Industry has been affected badly by COVID
and the Foreign Reserves depleted causing imports to rise
Ø Tourism industry accounted for 10 percent share of
GDP in Sri-Lanka prior COVID 19, but due to the pandemic tourism industry
halted and the shocks are seen this time.
Ø The earning from the foreign reserves dropped
drastically from 7.5 Billion USD in Fiscal Year 2019 to 2.8 Billion USD in the end
of July, 2020.
Ø With shortage of Forex reserve to import goods (even
for basic food supplies) the foreign currency had to be purchased and with this
the domestic currency of Sri Lanka, Rupee depreciated by 8 percent.
2.
Mr. Rajapakshe's decision to ban chemical
fertilizers on agricultural production and to make Sri Lanka 100 percent
organic state in agro based production
Ø According to the Food and Agriculture Organization –
2021, tea, rubber, coconut, and spices
are the major agricultural exports of Sri Lanka and rice is the largest agricultural production in there. So the
anti-chemical fertilizers law, Sri Lankan experts stated that the tea
production was reduced in half and causing others crops also to reduce their
respective production.
Ø The traders in Sri Lanka are hoarding the essential
food supplies and selling those food products at high prices. The army is
authorized to seize food supplies from the traders and supplying it to
consumers at fair prices.
Ø Also the foreign exchange reserves are used for the
purchase of the essential goods. Sri Lanka's central bank has been prohibiting
the traders for exchanging more than Rs. 200 for an USD and stopped traders
from entering into the forward currency contracts.
Ø The government of Sri Lanka has refused to end its
aggressive push for complete organic farming claiming that the short term pain
of going into the organic system would be compensated by its long term
benefits. It has also promised to supply farmers with the organic fertilizers
as an alternative.
IS
THE ACTION TAKEN BY SRI LANKAN GOVERNMENT IN RESPONSE OF THE CRISIS IS A GOOD
STEP?
Ø If we analyze the situation, the step taken by Sri
Lankan's government to continue with the organic law is seen to increase the
food prices even further because there would be the drastic drop in the
production of the food products and also the shortages of food products (demand
of the food products would be more than supply) would be there.
Ø Also, in addition to this the decision by Sri
Lanka's central bank to halt the forward contracts at the spot trading above
200 rupees to an USD also can affect in the essential supplies (for example: a
food trader who wants to pay more than Rs. 200 for an USD to import the food
product may be no longer to carry out the trade. And also without forward
contracts which helps the traders mitigate the currency volatility onto professional
speculators, many traders may be unwilling to import the essential food supplies.
WHY PAKISTAN IS FACING ECONOMIC CRISIS?
Presently the economic health of Pakistan is not up
to the mark. The inflation is surging high over there. The current account
deficit, deteriorating foreign exchange reserves and the currency depreciation
have been the major cause of the crises.
The major causes have been the domestic and global
factors of pandemic that is affecting the economy.
·
The foreign exchange reserve in Pakistan
According to the report published by State Bank of
Pakistan on November 19. 2021 the Foreign exchange reserves stood USD 22.77
billion. Out of this, USD 16.25 billion has held by the central bank and the
rest was with the commercial banks.
The reserves of the central bank declined by USD 691
million during the last week o9f November, 2021 due to the external debt
repayments.
·
Economic Growth in Pakistan
The annual economic growth in Pakistan was 5.8
percent in the year 2018, but it decreased to 0.99 percent in the 2019, and
further it decreased to 0.53 % in 2020. This led eventually to deplete in the
current account. As it is evident that a persistent high deficit can cause to
the excess supply of a country's currency in the foreign exchange market, which
further leads to deplete the nation's currency.
·
BOP crisis and IMF bailout
Due to the BOP crisis because Pakistan was unable to
finance its import bills or to service its external debt. Pakistan has been
importing most of the items on the domestic consumption and this has increased
the debt service obligations, which have made the situation even more worse.
The current account of Pakistan deficits in September and October have been way
larger than anticipated, reflecting both rising oil and commodity prices and
improving the domestic demand. The burden of adjusting to these external
pressures, as the central bank of Pakistan's monetary policy statement in
November is noted that it has highly fallen into the rupee.
In the year 2019, Pakistan sought rescue from the
IMF and it is reported in the last four decades Pakistan has 13 times bailed
out by the IMF.
For the current period, it is reported that 750
million in IMF special drawing rights (around USD 1 billion) will be available
to Pakistan, taking total disbursements to about USD 3 billion.
Also Pakistan is going to withdraw tax exemptions
and subsidies, increase in levy on petroleum products, raise the power tariffs,
and to audit USD 4.1 billion "extra funds" that is to be lent to
Pakistan in April, 2020 due to the pandemic.
·
The Deal with Saudi Arabia
Pakistan undertook USD 3 billion loan from Saudi
Arabia in November 27, 2021. The loan amount was agreed to keep in the
Pakistan's central bank. In 2018 Pakistan had undertaken from S. Arabia USD 3
billion loan and out of which about USD 1 billion was disbursed.
It is also reported that Pakistan is about to get
USD 7 billion from 3 other sources within the next 60 days, including the USD 3
billion in deposits from S. Arabia, a USD 1.2 billion Saudi Oil facility with
deferred payments, a USD 800 million Islamic Development Bank oil facility.
However, the ministry of Pakistan is stating that all of these would be enough
to lessen the pressure on the import bills.
But, the loan from Saudi Arabia comes with a rigid
interest rate of nearly around 4 percent can lead the situation to dilemma.
·
Inflation is Skyrocketing in Pakistan
In November, 2021 the inflation of Pakistan mounted
to 11.5 percent from 9.2 in October. The prices of the food items such as fresh
fruits, milk, and chicken increased to their highest levels. The regressive
domestic policy in Pakistan focusing on " to systemically penalize the
production of high value products by focusing support on wheat and
sugarcane". As a result, Pakistan remains an importer of the horticultural
products, dairy products despite having massive number of animals producing
below potentials, and cotton to feed the domestic textile industry.
WHY IS TURKEY
FACING ECONOMIC CRISIS?
Current Economic situation in Turkey
In Turkey, these days the price of medicine, milk,
even toilet paper are soaring. The Petrol pumps have been almost closed due to
the high prices of the petroleum products. The cost of living in Turkey has
skyrocketed and the 25 percent of the youth have been unemployed. Turkey also
has a huge debt and due to the losses in the value of the Turkish Lira, the
situation has been even more worsened.
Cause of the Economic turmoil in Turkey
The causes of the situation are –
·
The president of
Turkey Erdogan is quite rigid to lower down the interest rate and due to this
the inflation in Turkey has reached to 21 percent currently. The president has
threatened the central bank of Turkey to keep inflation in check and set the
interest rate again.
·
The Turkish Lira
on November 2020 was 7 to one Dollar ($) and currently in the month of November
2021 it has surged to 14.3 to one Dollar ($). The price of the imported goods
keep on rising.
·
President
Erdogan’s strategy to undertake expensive infrastructure projects enticed
foreign investors and encouraged businesses and consumers to load up to a debt
back in 2003 A.D. During the first decade of his reign Turkey was experiencing
an economic miracle, however, Erdogan’s dream to ever expand led him to go
towards the disaster and towards unsustainability. Rather than pulling back the
borrowing for the ambitious projects still continued.
·
President
Erdogan is also insisting that high interest rates cause inflation, even though
it is low interest rates that put more money into circulation, encouraging
people to borrow and spend more, and tend to increase price. This is the
statement by Erdogan. But, in actual terms it is not true. He is continuously
pushing the state bank of the Turkey to offer cheap loan to the households and
businesses so that the borrowing can continue in Turkey.
Economists’ viewpoint on Erdogan’s rigidity and
their solutions
Economists argue that by keeping the interest rate
low consumers will be more eager to keep shopping and business will be more
inclined to borrow, invest the amount in the economy and hire workers. He also
stresses that if the Turkish Lira loses value against dollar Turkish exports
will be simply cheaper and the foreign consumers will want to buy more. Economists
say that this is theoretically true, but, when it comes to Turkish imports, it
has high imports on the automobile parts, medicine, fertilizers, fuel, and
other raw materials. And when the Turkish Lira depreciates even more further it
is certain that those imports are going to cost high. This aspect is ignored by
Erdogan.
To be refrain of the basic economic theory it has
discouraged the foreign investors in Turkey as well. Foreign investors were eager to provide loan
to the Turkish businesses but now they are afraid of the currency depreciation.
And eventually the low interest rate will lead to rise inflation even further.
Economists suggest that to solve the present context
the interest rate should be risen for now so that the economy could be
corrected. They suggest that the economy should not be looked by President
Erdogan solely and his dogmatic beliefs should not interfere the functioning the
economy (President used to say that the interest charge is against the Islamic
law and violates the Islamic precepts). They also say that the suggestions from
the foreign nations should be taken instead of blaming those for the price
rise.
Source: Analysts at Indian Express, The Hindu, New
York Times, and Forbes.
Thank You
Aditya
Plz, laud with comments.
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