Sri Lankan Prime Minister Ranil Wickremesinghe, who took over in Maysaid late last month that the island nation’s debt-laden economy was “collapsed” and headed for “rock bottom”.
Short of cash to pay for imports of such needs and already defaulting on its debt, Sri Lanka is seeking help from neighboring India and China and from the international monetary fund,
on Saturday, Prime Minister Wickremesinghe and President Gotabaya Rajapaksa both agreed to resign amidst increasing pressure from Protesters stormed both their residences and set one of them on fire,
Sri Lankans are giving up on food as they endure shortages and stand in line for hours trying to buy scarce fuel, This is a bitter truth for a country whose economy was booming, with a growing and comfortable middle class, until the latest crisis deepened.
How serious is this crisis?
The government owes $51 billion and is unable to make interest payments on its loans, let alone a dent in the amount borrowed. Tourism, a key engine of economic growth, has been stymied by concerns about the pandemic and security following terrorist attacks in 2019 and its currency depreciating by 80 percent, making imports more expensive and worse. inflation This is already out of control, according to official figures, with the cost of food rising by 57 percent.
The result is a country headed for bankruptcy, with hardly any money to import petrol, milk, cooking gas and toilet paper.
Political corruption is also a problem; Not only did this play a role in causing the country to waste its wealth, but it also complicated any financial rescue for Sri Lanka.
Anit Mukherjee, a policy fellow and economist at the Center for Global Development in Washington, said any aid from the IMF or the World Bank must come with strict conditions to ensure that aid is not mismanaged.
Still, Mukherjee said Sri Lanka sits in one of the world’s busiest shipping lanes, so letting a country of such strategic importance collapse is not an option.
How is it affecting real people?
There is generally no shortage of food in tropical Sri Lanka, but people are starving. The United Nations World Food Program says nine out of 10 households are skipping meals or otherwise skimping on their food intake, while 3 million are receiving emergency humanitarian aid.
Doctors have taken to social media to procure vital supplies of equipment and medicine. An increasing number of Sri Lankans are asking for a passport to go abroad in search of work. Government employees have been given an extra day off for three months to give them time to grow their own food.
In short, people are suffering and desperate for things to improve.
Why is the economy in such a bad shape?
Economists say the crisis stems from domestic factors such as years of mismanagement and corruption.
Much of the public’s anger has centered on President Rajapaksa and his brother, former Prime Minister Mahinda Rajapaksa. He later resigned in May after weeks of anti-government protests that eventually turned violent.
The situation has been getting worse for the last several years. In 2019, Easter suicide bombings in churches and hotels killed more than 260 people. It devastated tourism, a major source of foreign exchange.
The government needed to increase its revenues as foreign debt for major infrastructure projects soared, but instead Rajapaksa pushed for the biggest tax cuts in Sri Lanka’s history. The tax cut was reversed recently, but only after creditors downgraded Sri Lanka’s rating, barring it from borrowing more money as its foreign reserves sunk. Then tourism fell flat again during the pandemic.
In April 2021, Rajapaksa abruptly banned the import of chemical fertilisers. The push for organic farming caught farmers by surprise and destroyed staple rice crops, driving up prices. Imports of other items considered to be luxuries were also banned in order to save foreign exchange. meanwhile, Ukraine The war has pushed up the prices of food and oil. Inflation was close to 40% and food prices rose by around 60 per cent in May.
Why did the PM say that the economy has collapsed?
The apparent announcement in June by Wickremesinghe, who is in his sixth term as prime minister, threatened to undermine any confidence in the state of the economy and did not reflect any specific new developments. The prime minister appeared to be outlining the challenges facing his government as it seeks help from the IMF and faces criticism over the lack of reform since he took office weeks ago. Maybe the comment is aimed at trying to buy more time and support as he tries to get the economy back on track.
The finance ministry said Sri Lanka has only $25 million of usable foreign reserves. This has left it to pay for imports, let alone billions in debt.
Meanwhile, the Sri Lankan Rupee has weakened around 360 levels against the US Dollar. This makes the cost of imports even more prohibitive. Sri Lanka has suspended repayment of foreign debt of about $7 billion due this year out of $25 billion to be repaid by 2026.
What is the government doing about the crisis?
So far Sri Lanka is reeling, mainly backed by $4 billion in credit lines from India. An Indian delegation visited the capital Colombo in June to negotiate more aid, but Wickremesinghe warned against expecting India to keep Sri Lanka afloat for a long time.
A headline in the Colombo Times in June said, “Sri Lanka has last hopes from the IMF.” The government is negotiating a bailout plan with the IMF, and Wickremesinghe has said he expects a preliminary agreement to be reached later this summer.
Sri Lanka has also sought more help from China. Other governments such as the US, Japan and Australia have provided a few hundred million dollars in support.
Earlier in June, the United Nations launched a worldwide public appeal for aid. As of now, the estimated funding barely scratches the surface of the $6 billion that the country needs to keep afloat over the next six months.
To counter Sri Lanka’s fuel shortage, Wickremesinghe told The Associated Press in a recent interview that he would consider buying more subsidized oil from Russia.