Sri Lanka’s prime minister said late last month that the island’s debt-laden economy had “collapsed”, with money running out to pay for food and fuel.
Short of cash to pay for the import of necessities, and already defaulting on its debt, the country seeks help from neighboring India and China and from the International Monetary Fund.
Prime Minister Ranil Wicker Messing, who took office in May, underlined the difficult task he faces in upsetting an economy he said is on its way to “trough”. But on Saturday, he and President Gotabaya Rajapaksa agreed to resign, amid increasing pressure from protesters who stormed their home and set one of them on fire.
Sri Lankans skip meals and queue for hours to buy scarce fuel. This is a harsh reality for a country whose economy has grown rapidly, with a growing middle class, until the recent crisis has worsened.
Sri Lanka’s government owes $ 51 billion and is unable to make the interest payments on its loans.
Tourism, a major driver of economic growth, was halted by the pandemic and security concerns following terrorist attacks in 2019. Its currency also collapsed by 80%, making imports more expensive and exacerbating inflation which is already out of control, with a 57% percent jump in the cost of food.%, according to official data.
The result: a country heading for bankruptcy, where there is scarce money to import petrol and cooking gas, not even milk and toilet paper.
Political corruption is also one facet of the dilemma, and not only played a role in the state’s squandering of its wealth, but also made any financial rescue of Sri Lanka difficult.
From the Sri Lanka protests (Reuters)
Any assistance from the International Monetary Fund or the World Bank must come with strict conditions to ensure money is not mismanaged, said Annette Mukherjee, co-economist at the Center for Global Development in Washington.
In contrast, he noted, Sri Lanka lies in one of the world’s busiest shipping lanes, so crumbling a country of such strategic importance “is not an option.”
Tropical Sri Lanka does not have a shortage of food resources but the people are hungry. The United Nations World Food Program says nearly nine out of 10 families skip meals or eat less, while 3 million receive humanitarian first aid.
Doctors used social media to try to get the necessary equipment and medicine. More and more Sri Lankans are looking for passports to flee abroad in search of work. Government employees were given an extra day off for three months to give them time to grow their own food.
deterioration over the years
Economists say the crisis stems from domestic factors such as years of mismanagement and corruption. Much of the public’s anger was focused on President Rajapaksa and his brother, former Prime Minister Mahinda Rajapaksa. The latter resigned in May after weeks of anti-government protests that eventually turned violent.
Conditions have deteriorated over the past few years. In 2019, terrorist attacks on churches and hotels on Easter Sunday claimed the lives of more than 260 people. It has destroyed tourism, a major source of foreign exchange.
The government had to increase its revenue as foreign debt rose to finance massive infrastructure projects, but Rajapaksa instead insisted on the largest tax cuts in Sri Lanka’s history. The tax cuts were recently reversed, but only after creditors downgraded the country’s rating, which prevented it from borrowing more money as its foreign reserves declined. Then tourism declined again during the Corona epidemic.
From the Sri Lanka protests (Reuters)
In April 2021, Rajapaksa suddenly banned the import of chemical fertilizers, which put pressure on farmers, destroyed rice staples and drove up prices. To save foreign currency, the importation of other items that are considered luxury is also prohibited.
Meanwhile, Ukraine’s war has pushed up food and oil prices, the country’s inflation has approached 40% and food prices rose by almost 60% in May.
The Ministry of Finance said that Sri Lanka has only $ 25 million in usable foreign reserves. That left it without the funds to pay for imports, let alone billions in debt.
At the same time, the Sri Lankan rupee depreciated to about 360 against the dollar. This makes import costs more complex. Sri Lanka has stopped repaying about $ 7 billion in foreign loans owed this year out of the $ 25 billion to be repaid by 2026.
Sri Lanka has shaken so far, mainly backed by India’s $ 4 billion lines of credit. An Indian delegation arrived in the capital, Colombo, in June for talks on more aid, but Prime Minister Wickremesinghe warned not to rely on India to keep Sri Lanka going for so long.
Hope for the International Monetary Fund
Sri Lanka’s government is negotiating a rescue plan with the International Monetary Fund, and Wicker Messing said he expects an initial agreement to be reached later this summer.
The country also requested more help from China. Other governments such as the United States, Japan and Australia have provided several hundred million dollars in support. Earlier in June, the United Nations launched a global public call for help. So far, the projected funding barely touches the surface of the $ 6 billion the country needs to stay afloat over the next six months.
To counter the fuel shortage in Sri Lanka, Wicker Yemsing said in a recent interview with The Associated Press that the country may be able to buy more low-cost oil from Russia.