Sri Lanka's Economy
Lessons from Sri Lanka
What Sri Lanka's history teaches about social spending, debt, policy shocks and institutions, and a recap of the module.
Sri Lanka’s experience offers clear lessons.
Lessons
- Social investment can deliver high human development at low incomes.
- Tax cuts without spending cuts can cause fiscal crises; Sri Lanka’s 2019 tax cuts sharply reduced revenue before COVID hit.
- Commercial borrowing for low-return projects is risky.
- Sudden policies, like the fertiliser ban, can backfire.
- Foreign exchange buffers matter for import-dependent countries.
- Institutions and accountability matter.
Module recap
- Sri Lanka built an early welfare state.
- It liberalised in 1977.
- The civil war (1983-2009) was costly.
- Tea and garments are major exports.
- Tourism crashed after 2019 and recovered.
- Hambantota fuelled a disputed debt-trap debate.
- The 2021 fertiliser ban caused crop losses.
- The Aragalaya toppled the president in 2022.
- IMF support and restructuring aided recovery.
- India provided about 4 billion dollars in help.
The tax cut
In 2019, Sri Lanka cut VAT and income taxes sharply. Revenue fell just as the pandemic hit, leaving little room to respond.
Thinking crises have a single cause
Sri Lanka's crisis combined tax cuts, debt, shocks and policy errors.
Key takeaways
- Social investment pays off.
- Tax cuts, debt and shocks combined into crisis.
- Sudden policies can backfire.
- Buffers and institutions matter.
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