Economic Impact of Sri Lankan Attacks

The small island nation of Sri Lanka now finds itself in the throes of one of the deadliest terrorist attacks that the world has ever seen. On 21st April, i.e. on Easter Sunday, suicide bombers attacked heavily crowded churches as well as hotel lobbies. They ended up killing close to 350 people and destabilizing the entire region.

This has come as a shock to the people of Sri Lanka as well as to the international community. Sri Lanka was known for problems between the two dominant ethnic groups, i.e. the Tamils and the Sinhalese. However, the island nation does not have a Muslim majority. Muslims constitute only 9% of the population of this small nation. This is why the rise of radical Islam is alarming in Sri Lanka.

The human effects of the deadly terrorist attacks are being widely documented. However, it is also important to understand that these attacks also have an economic undercurrent. This article provides a detailed explanation of the economic issues related to the recent terrorist attack in Sri Lanka.

Effect on Tourism

Bomb blasts and terrorist attacks have an obvious effect on the tourism industry of any nation, and Sri Lanka is no exception. The problem is that in most nations, tourism accounts for a relatively small portion of the government’s revenue. However, in the case of Sri Lanka, tourism is by far the biggest industry in the country.

After the decades of civil war that tore the country apart, Sri Lanka had recently become a peaceful tourist destination. The number of tourists visiting Sri Lanka has grown rapidly. For instance, in 2009, the number of tourists visiting Sri Lanka was less than half a million. However, in 2018, the same number had climbed to over two million.

Sri Lanka has been frequently mentioned in the Lonely Planet’s list of top global tourist destinations. In 2019, the country was rated as the number one destination to visit by Lonely Planet magazine. This is because, according to them, Sri Lanka offered something to everyone. The country has ancient temples and also beaches which are frequently used for adventure water sports making it a preferred destination for tourist worldwide.

Also, tourism is a labour intensive business. This is the reason why this sector also provides a lot of employment to the people in the small island nation. An adverse impact on tourism would therefore automatically become an adverse impact on the unemployment in the region.

Foreign Debt Issues

The Sri Lankan economy is heavily in debt. The external debt to GDP ratio of Sri Lanka is over 80%. This means a lot of Sri Lankan debt is not denominated in Sri Lankan rupees. Instead, it is denominated in currencies like Yuan, United States dollars and even the Indian Rupee. This means that if Sri Lanka fails to earn foreign exchange, it may have difficulties paying down foreign debt. This could be problematic for the island nation since the last time they couldn’t afford to pay a debt, they had to hand over their port to the Chinese.

Higher Defence Spending

Sri Lanka is still a developing economy. This means that it needs to spend a high portion of its GDP on essentials such as education, health, and sanitation. However, for the past many years, Sri Lanka has been spending a lot of money on defence. This is because the country has been living in a perpetual state of civil war. Now, with Islamic terrorism on the rise, the country may again have to spend a lot of money on defence. From an economic point of view, this spending does not add any value to the economy. However, the Sri Lankan government will be forced to spend huge sums of money on these non-essential items. It may also end up going deeper into debt thanks to this massive spending.

Lower Tax Revenues

Rising terrorism in Sri Lanka is bad news for the economy in general. The GDP of Sri Lanka is expected to slow down in the forthcoming years. This means less economic activity in general. Also, since the government of Sri Lanka earns tax revenues based on the level of economic activity in the country, it is bad news for the government of Sri Lanka as well.

Loss of Investor Confidence

Since Sri Lanka is a developing country, it relies extensively on foreign investment. However, with terrorism becoming a real threat, investors are likely to shy away from the island nation. Also, as mentioned above, the economy as a whole is likely to remain subdued. Also, unfortunately for Sri Lanka, the dollar is also gaining strength. Hence, foreign investors are more likely to repatriate their money into a growing American economy instead of holding it in a volatile emerging economy like Sri Lanka. In the absence of these terror incidents, the foreign investments would have continued unabated. Hence, it would be fair to say that the terror incidents are likely to set back the Sri Lankan economy by many years.

The bottom line is that Sri Lanka is likely to face a lot of financial repercussions of the terrorist incidents that have recently happened in the country. Recovering from these incidents and becoming a stable economy once again are long term goals of the Sri Lankan government which are likely to take a long time.