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An Economic Cataclysm—Sri Lanka’s Financial Crisis

The island nation of Sri Lanka is currently facing the heavy consequences of its government’s financial mismanagement and ill-timed decisions. A tremendous drop of 70 per cent in foreign exchange reserves has pushed the country to the verge of defeat. The coronavirus pandemic further dealt a massive blow to Sri Lanka’s already crumbling economy. With $7 billion to be paid in foreign debt obligations this year and just about $2 billion left in foreign exchange reserves, Sri Lanka faces the unenviable dilemma of choosing between paying for crucial imports and repaying its foreign investors.

The ones that are suffering the most during this economic calamity are the families belonging to the low-income sector of society. The inflation rate in Sri Lanka has skyrocketed to 17.5 per cent, the highest in Asia. Food and medicine costs are surging like never before. The ongoing war between Russia and Ukraine has only added to the misery of the common man by driving up the prices of oil. Four elderly men have lost their lives waiting in queues to buy fuel in the sweltering heat. Soldiers have been posted at hundreds of gas stations to prevent violence, stockpiling, and inefficient distribution. People have been forced to take up a second job, but the income from these is still not enough to sufficiently support their families and themselves. Paper and ink shortages mean students cannot give their exams. Hospitals are reporting shortages of necessary medical equipment. People are choosing to self-medicate instead of going to a doctor to get treated, which can only lead to higher morbidity rates. Electricity is also a rare commodity now, with daily ten to thirteen-hour power cuts becoming the norm. The drastic decrease in their quality of life has inevitably led to thousands protesting against the government and demanding change.

Sri Lankans waiting in a queue to refill their cooking gas cylinders in Colombo

Sri Lankans waiting in a queue to refill their cooking gas cylinders in Colombo. [Credits: AP Photo/Eranga Jayawardena]

Sri Lanka’s public debt is currently estimated to be 119 per cent of its GDP. This means that the country owes more than it can produce through goods and services. The largest portion of its foreign debt comes from international sovereign bonds, which make up 36.4 per cent of the total debt. These are followed by loans from the Asian Development Bank, Japan, and China. India has offered a $1 billion line of credit to assist Sri Lanka in procuring essentials such as food, fuel, and medicine. In addition to this, India has also extended a $400 million currency swap and $500 million for 40,000 tonnes of diesel to help with severe fuel shortages. India has also deferred the payment of $515.2 million by two months to the Asian Clearing Union.

This is the worst economic crisis the country has faced, since gaining independence in 1948. Sri Lanka is deep in debt with no single way to overcome it.

Who’s responsible?

The Sri Lankan government began financing its investments through foreign borrowings and in 2007, issued its first international sovereign bond for $500 million. A sovereign bond is a debt security issued by a government that can be denominated in both foreign and domestic currency. The buyer would be paid a given amount of interest for a stipulated number of years along with repayment of the face value on the maturity of the bond. The three-decade-long civil war with the Tamil militancy ended in 2009, following which the government focused on reconstruction and real estate. The nation was desperate to pay off foreign debt but didn’t work much towards diversifying its exports, an important source of forex. In 2019, the Rajapaksa government cut value-added tax from 15 per cent to 8 per cent which caused revenue losses of more than 2 per cent of its GDP. The same year saw the devastating Easter Sunday bombings that also took a toll on the tourism industry.

Police fired tear gas and water cannon at hundreds of university students who were trying to break through barricades near the town of Kandy. [Ishara S. Kodikara/AFP]

Police fired tear gas and water cannon at hundreds of university students who were trying to break through barricades near the town of Kandy. [Credits: Ishara S. Kodikara/AFP]

In 2020, the coronavirus pandemic caused Sri Lanka’s unstable economy to take a turn for the worse. The vital tourism sector dried up. Lockdowns disrupted the informal sector, which accounts for about 60 per cent of the country’s total workforce. Tax cuts from the previous year weakened the government’s ability to deal with the public health crisis. Further, in 2021, the government announced a ban on the import and use of chemical fertilisers and pesticides in an attempt to promote organic farming, as well as to conserve quickly depleting forex, which only led to shortages in crop yield and inflation in food prices. Remittances from foreign workers, the nation’s biggest source of dollars, also dropped by 22.7 per cent in 2021. That September, President Gotabaya Rajapaksa declared a state of economic emergency in the country to take control of the supply of basic food items and fix prices to control inflation. Due to the relentless protests of the citizens, the government has dissolved as all governmental authorities resigned except for Prime Minister Mahinda Rajapaksa and President Gotabaya Rajapaksa. Even after the imposition of a social media shutdown, people still circumvented using VPNs and got to the streets to march against the administration. The next major challenge that Sri Lanka needs to tackle is the repayment of a $1 billion bond maturing in July 2022

Sri Lankan soldiers walk past a bus burned by demonstrators at the top of the road of President Rajapaksa's residence in Colombo, Sri Lanka [Dinuka Liyanawatte/Reuters]

Sri Lankan soldiers walk past a bus burned by demonstrators at the top of the road of President Rajapaksa’s residence in Colombo, Sri Lanka [Credits: Dinuka Liyanawatte/Reuters]

In the last decade, China has financially supported Sri Lanka by lending over $5 billion to help with projects like building roads, ports, and an airport. According to critics, however, these funds were utilised for unnecessary ventures with low returns. President Gotabaya Rajapaksa has now asked China to restructure its debt repayments, in addition to asking for concessions on imports from China, to help Sri Lanka tide over its financial crisis. President Rajapaksa also offered to allow Chinese tourists to return to Sri Lanka, a major move in the wake of the COVID-19 pandemic. Sri Lanka is a significant member of China’s Belt and Road initiative, which is a long-term project focused on building infrastructure that links China with the rest of the world. This project has been called a “debt trap” for smaller nations with unstable economies. 

How It Affects India

The port of Colombo is a major trans-shipment hub on which India is heavily dependent for global trade. While exports to Sri Lanka only amount to 1.3% of India’s exports, 60% of India’s cargo trans-shipments are handled by this port. Any disruptions at Colombo port leave India vulnerable to increased costs and congestion issues. 

India is among the biggest drivers of Foreign Direct Investment in Sri Lanka. Investing in a wide range of sectors such as petroleum retail, hotels, real estate, manufacturing, telecommunication and banking services. Many Indian companies have a significant presence in Sri Lanka. Located at the centre of the Indian Ocean, Sri Lanka is a country of major military and geopolitical importance. In the last decade, Chinese influence in Sri Lanka has grown multifold, making China its largest import partner and one of its largest investors in public infrastructure projects. The Chinese presence in Sri Lanka is a cause of concern for India. However, Sri Lanka’s debt crisis has created an opening for India to counter Chinese influence. In the last few months, India has provided monetary support as well as relief in the form of food and medicine.

So far, sixteen Sri Lankan Tamils have arrived at Indian shores seeking refuge. They fled due to severe food shortages. India has not granted refugee status to any Sri Lankan since 2012, after the civil war. The Chief Minister of Tamil Nadu, M K Stalin, conferred with Prime Minister Narendra Modi requesting him to allow the Tamil Nadu government to provide humanitarian aid to the Tamils living in the northern and eastern parts of Sri Lanka.

Overcoming The Economic Crisis

Sri Lanka is currently facing a shortage of foreign exchange to pay for its imports. The government is now borrowing from other governments and carrying out currency swaps to overcome the forex deficit. However, these measures are not enough. The country has approached the IMF for help, to wade over this crisis. The IMF has recommended some policy changes to ensure that the most vulnerable are protected including but not limited to, reforming the revenue generation and collection system, increasing taxes to improve Sri Lanka’s low tax-to-GDP ratio and ensuring a greater contribution from higher-income earners of the country, and leaving fuel and exchange rates to the market rates.

Sri Lanka's inflation rate has increased to 17.5 per cent. [Credits: CNN]

Sri Lanka’s inflation rate has increased to 17.5 per cent. [Credits: CNN]

The IMF has also proposed the need for a banking act giving the Central Bank of Sri Lanka more regulatory powers to aid the process of resolving the country’s debt. Sri Lanka also desperately needs to diversify its exports as it is heavily dependent on tea leaves. The removal of import restrictions can help encourage investments, bringing in the necessity for exports. There is a need for reforms to improve conditions and ensure financial security for the labour force in farming and non-farming sectors to ensure the people living at the edge are uplifted first. 

Once revered as the radiant Pearl of the Indian Ocean, Sri Lanka’s crippling economy has rendered it a husk of its former self. The congregations within the government can only do so much to restore financial stability. The country desperately needs international helping hands to resolve the crisis, and revive the tourism industry in the process. The several strategies in place could eventually create a strong momentum—one which can hopefully pave the way to rekindle the glory of Sri Lanka.

Featured Image Credits: CNN




Tearing Apart the Seams of the Fashion Industry—Sustainability and Fast Fashion

In recent years, the term “fast fashion” has gained prominence after the environmental impacts of the textile production industry were brought to the forefront due to the climate change awareness movement worldwide. So, what does this term mean? Simply put, fast fashion involves the quick production of large quantities and varieties of garments at a low manufacturing cost which inevitably hurts the environment and the energy sector. Moreover, the fast-fashion business model offers huge profits to clothing companies and is hence widely adopted. As a result, today’s socially well-connected audience witnesses new items dropping in every week of the year. This translates to fifty-two “micro-seasons” in the world of fashion, where once four seasons was the maximum.

Luring customers with the promise of a discount in a clothing shop. Source: Letter E Blog

How It Impacts the Environment

Clothing production is responsible for about 10% of global carbon emissions and about 20% of wastewater. Fabric dyes pollute water bodies, and the stretchy elastane found in jeans is derived from plastics (including polyester, nylon, and acrylic) that make them less recyclable. Dyeing and finishing, yarn preparation, and fibre production are examples of processes within this extremely resource-intensive industry that lead to depletion of non-renewable resources and heavy energy and water usage. To provide some perspective, the fashion industry consumes more energy than the aviation and shipping industries combined.

The goal of a fashion house or brand in today’s digital age is to produce a wide variety of trendy garments within the shortest time possible and offer products to consumers at a reasonable price. In 2012, Zara was able to bring to the market a new garment every two weeks. Other popular brands like Forever 21 and H&M took about six to eight weeks to add more styles to their already huge collections. The speed at which the market changes is incredible, particularly when compared to the time taken by actual designers (instead of business moguls commanding the replication of popular styles) to produce new designs, which usually takes months.

The average consumer now has more reason to shop for new clothing regularly, adding new pieces to their wardrobe now and then. According to The True Cost, a documentary released in 2015, the world consumes around 80 billion new pieces of clothing every year, 400% more than the consumption 20 years ago. It is clear that to meet this demand and maximize profits, brands have to resort to cheaper and quicker manufacturing processes. At this point, one can ask the question: are profit-minded companies the core of this problem, or is it the shift in the attitude of the masses in recent years? This trend has inevitably caused adverse environmental effects of the production processes to skyrocket, showing no signs of stopping anytime soon.

 

Environmental impact of the fashion industry.  Source: DW

However, this story does not end when the consumer has bought the product. Washing garments release 500,000 tons of microfibres into the ocean every year, which is the equivalent of 50 billion plastic bottles, resulting from using cheap raw materials for making the item. Furthermore, the fast-fashion model encourages regular disposal of “last season” or “out of style” items by perpetuating the slogan of “being on-trend”, leading to about 85% of all textiles produced landing in dumps annually. Clothing containing plastic derivatives, like the aforementioned elastane, can take hundreds of years to biodegrade. Clearly, this model is the epitome of the consumerist culture that prevails in today’s world, heavy on our wallets and the environment.

Behind the Scenes of the Fashion Industry

Unethical working conditions, dilapidated work buildings, verbal abuse, sexual harassment, illegally lengthy working hours, lapses in payment, and if a salary is provided, much below the minimum wages— these are just some of the struggles a garment factory worker has to face on a day-to-day basis. In 2017, customers in Zara stores in Istanbul found messages for help hidden within the pockets and creases of the clothing on sale. These cards read, “I made this item you’re going to buy, but I didn’t get paid for it!”

Many call such workers the sufferers of modern-day slavery— an analogy not too difficult to understand once their conditions are made clear. Many brands source their products from external suppliers instead of independently making them. These suppliers further subcontract manufacturing factories where these workers are employed. These factories recruit women and children from low-income families with promises of sufficient wages and education, which are ultimately never kept. With all their time spent working under inhumane conditions out of helplessness and the need to support themselves and their families, these children never get a chance to get educated and gain the skills needed to get employed elsewhere, thus trapping further generations as well. In addition, women are often the victims of terrible verbal, physical and sexual abuse. These workplaces are called sweatshops, and working hours here far exceed the maximum limit imposed by the governments of countries where these factories are found. The daily production goals to be met by each worker are unreasonable and exhausting.

Sweatshop workers in Bangladesh hold up signs in protest. Source: Shakti Collaborative

After gaining some insight into this situation, an important question arises: who should be held accountable for such a gross abuse of human rights? Since brands themselves do not employ these workers but place orders for products, can they be blamed? Perhaps not. However, brands can be coerced to take greater responsibility for ethically sourcing their items if the consumers pressure them to do so. An effective solution can be the independent manufacture of items by brands buying factories themselves. In addition, gaps in the efficient implementation of labour laws in countries such as Bangladesh, Thailand, and India must also be addressed to stop exploitation at the manufacturing level.

Can Every Consumer Afford to Support Such a Movement?

One of the many short-term advantages that fast fashion retailers can offer to consumers is affordability. Customers can buy pieces that look almost the same as those seen on runways or celebrities for half the price, enabling them to make more purchases later on, as and when the trend changes. Only by using cheaper production methods and raw materials can such a low price point be achieved. Unfortunately, these ingredients-for-success usually tend to be non-renewable. In addition, producing such fabrics requires an immense amount of energy, further increasing depleting fossil fuels and ramping up carbon dioxide emissions.

Fashion shows where the latest designs are showcased, and cheap imitations are made at half the price. Source: Knapton Wright

Production of sustainable fashion may involve using renewable energy sources and recycled raw materials and producing high-quality pieces that are meant to last for a long time, hence breaking the chain of buying and discarding items regularly. So, if companies are to produce clothing more sustainably, it goes without saying that the production processes will become more expensive, and so will the end product. A consumer prefers buying the cheaper variant of the same style and doesn’t necessarily pay much heed to the ‘sustainably produced’ tag on the more expensive garment. If these products are ignored, the company faces huge losses due to the increased production costs and low profits and is discouraged from pursuing such a venture. In such a scenario, it becomes clear that shifting the market towards the inclusion and successful retail of sustainably produced products would take much more than mere advertisement campaigns or indication of lesser wastage on clothing tags.

Rising Awareness Among the Public in Recent Years

Most can agree that the main propagator of the consumerist lifestyle is social media. However, the same platforms are now being used to spread awareness about the impact of fast fashion, the poor conditions of factory workers, and their mistreatment by huge brands. Searching for ‘#sustainablefashion’ displays about 10.7 million posts on Instagram, where people share their new finds, be it clothing made from recycled materials or the new thrift store that’s opened up in town. It can be said that a sort of rebellion against our own consumeristic habits is gaining traction, and everyone wants to take part. As a result, several brands indicate that they are trying to incorporate environment-friendly techniques in their manufacturing processes. Advocating for sustainability has become a major part of advertising campaigns, which has led to a rise in awareness among the general public. However, it is unclear if brands invest more time and funds into developing technology to utilise the resources involved to the maximum extent and reduce wastage.

Greenwashing is a term used to denote how companies use buzzwords like sustainability and ethical fashion to favour the socially more aware generation without actually providing a clear explanation of how their products are made. Identifying and verifying the morals of a brand hence gets more confusing and overwhelming for the everyday consumer. In response to the protests made by unpaid workers, Zara’s parent company Inditex set up a hardship fund after partnering with other brands like ‘Mango’ and ‘Next’ to compensate for the losses endured by the most vulnerable among the protestors. However, this could not cover the losses of every worker, and hence they remained unsatisfied.

Mission Thrift is a volunteer-driven store where people can donate their secondhand clothes. Source: Bloomberg

‘Depop’ is an example of an online thrift store, where users can buy second-hand items and sell clothes as well as other items they own. Such initiatives provide ease of shipping items to customers and help bridge the gap between sellers and potential buyers, making it simple for users to sell items they no longer need that are still fit for use. Various other types of thrift stores with different themes have opened worldwide, both in-person and online, and are being popularised. An example of such a store in India is the ‘Bombay Closet Cleanse’. Thrift stores are an important step towards reducing the immense wastage of clothes taking place every year.

Every consumer must recognise their power to contribute to reducing one’s carbon footprint and subvert this ethically unjust system by choosing to shop and discard more consciously and less frequently than before. The development and incorporation of technologies like Artificial Intelligence (AI) and blockchain in the fashion industry have helped make the production processes (from sourcing raw materials to shipping and reuse) more transparent. In addition, better implementation of workplace rules and regulations and responsible consumption by citizens can overcome the disastrous trend of fast fashion, guiding us towards a more sustainable future.

Featured Image credits: Firstpost