The Sri Lankan Economic Crisis and Stock Market: Bijay Sapkota

A Glance at Sri Lankan Economic Crisis

Sri Lankan economic crisis is a burning issue in the global market. The heavy tax cuts and money printing, increasing external debt, negative impacts on tourism, over-ambitious steps taken by the government to ban 100% import of chemical fertilizers, political instability, and mismanagement are some of the crucial causes behind the present crisis of Sri Lanka. The COVID-19 pandemic, followed by the ongoing Russian invasion of Ukraine has added more fuel to the crisis.

The tax cuts by Rajapaksa during a 2019 election campaign created a heavy shortfall in the government revenue soaring budget deficit which was later on financed through public and international borrowings that swung up the debt to the GDP chart. While foreign debt was around 42% of the GDP in 2019, it rose to 119% in 2021 and was further high by 2022. Money printing of 119 billion rupees on April 6, 2022, has depreciated the Sri Lankan rupees further soaring the inflation from 6.2% in September last year to 17.5% in February this year as measured by CPI. Similarly, the tourism sector of the country accounting for around 10% of GDP has been badly affected by the COVID-19 pandemic and the 2019 Easter bombings. On the other hand, banning 100% import of chemical fertilizers aiming to be the first country producing 100% organic crops in the South Asian economy has negatively affected the tea production, the major export of Sri Lanka and other crops thereby increasing imports to fulfill the public demand.

The twin deficits namely budget deficit and trade deficit have affected the foreign exchange reserve and it is plummeted by almost 72% from $6.9 billion in 2018 to only about $1.9 billion as of March 2022, this being insufficient to pay the foreign debt of $4 billion and an international sovereign bond due of $1 billion for the year 2022. Recently on 12^th April 2022, Sri Lanka announced that it will be defaulting on its external debt of $51 billion.

Sri Lankan Stock Market History and Performance Amid Crisis

After its independence in 1948, the formal stock exchange was established in 1985 with the name Colombo Stock Exchange (CSE) currently headquartered at World Trade Centre in Colombo with 15 registered brokerage firms working under it. Currently, 296 companies are listed under CSE representing 20 GICS industry groups as of 31^st March 2022, with a market capitalization of Rs 3826.5 billion. There are mainly two indices in CSE as

• All Share Price Index (ASPI)
• S&P Sri Lanka 20 Index (S&P SL20)

All Share Price Index (ASPI)

All-Share Price Index (ASPI) is a major stock market index that tracks the performance of all companies listed on the Colombo Stock Exchange in Sri Lanka. It is a capitalization-weighted index with a base value of 100 as of 1985. It is the comprehensive measure of the Sri Lankan stock market.

Fig1: Performance of ASPI During Last 25 Years

Source: Trading Economics

If we see the major historic moves of ASPI, there was a notable boom after September 2001 till February 2007 hitting the historic high of 2983 from 404 by around 7.5 times ignoring minor corrections during the period. Then after a major downfall started thereby plummeting the index near 1500 by around 50% till December 2008. There was an exponential growth of 5.2 times in the Sri Lankan stock market after 2009 reaching around 7800 by February 2011 within just two years. Then we can observe a sharp fall to around 4800 by May 2012 which was almost 38% of the previous high. After this fall we can notice a consolidation period of around 8 years between 2012 and 2020 during which the Sri Lankan stock market was hovering around the previous high and low. Amid the COVID-19 pandemic and economic crisis, the Sri Lankan stock market witnessed a boom thereby making an all-time high record of 13462 by ASPI on January 19, 2022, starting from 4572 in March 2020, which is more than 3 times its starting point. Since January this year, the Sri Lankan stock market is performing worse mirroring the ongoing economic crisis there. Recently the ASPI is falling continuously from its all-time high and closed at 8135 as of April 08, 2022, which is almost 40% of its all-time high.

S&P SL 20 Index

S&P SL 20 index was launched on 26 June 2012, based on 20 blue-chip companies in the Sri Lankan stock market. There is no long history of the S&P SL 20 Index, unlike ASPI.

Fig2: Performance of S&P SL 20 Index Since 2012

Source: Investing.com

Since its initiation in 2012, the index had reached the historic record high of 4139 in February 2015. Afterward, we can see the index was hovering around its base point and record high between 2015 and 2019 sliding down to its all-time low of 1933 in March 2020. S&P SL 20 index had recently embraced its all-time high of 4233 in January 2022 amid the COVID-19 pandemic and economic crisis. After this peak, the S&P SL 20 index is sliding down continuously as a reflection of the ongoing economic crisis in the country and closed at 2623 as of April 08, 2022.

Closing Remarks

The stock market is very sensitive to various economic and political events within the country, hence called the leading indicator of the economy. The overall economic and political performance of the country is reflected in the movement of the stock market. The economic downfall and instability of Russia, Sri Lanka, and Ukraine is being mirrored by the sharp fall in the stock market of their respective countries.

We can also relate the scenario of the Nepalese economy, political situation, and the stock market. We have been witnessing disturbances in our stock market because of various political changes in our country like changes in government, the appointment of a new finance minister and the governor, and so forth. Similarly, for a few months, our economic indicators are performing low which is being reflected through the NEPSE index sliding downhill after reaching its all-time high of 3227 back in August this year. Now the NEPSE index is trading around 2400 supported by the economic downturn.

Article by Bijay Sapkota