Why Sri Lanka is on the brink of bankruptcy and what the government is doing


According to the World Bank, five million people in Sri Lanka have fallen below the poverty line since the COVID-19 pandemic hit, food inflation has also hit a record 21.5%

Sri Lanka’s leading opposition activists hold torches during a demonstration to denounce the shortage of cooking gas, kerosene and some other commodities as the country faces a major currency crisis, in Colombo. AFP

Supermarket shelves in Sri Lanka are empty and restaurants cannot serve meals.

The country is facing a worsening financial and humanitarian crisis that could drive it into bankruptcy in 2022 as inflation hits record highs.

The World Bank estimates that five million people in Sri Lanka have fallen below the poverty line since the pandemic hit, which it described as a “huge setback equivalent to five years of progress”.

What is happening in our neighbor and what could be the consequences for India and the region? Here are some answers to your questions:

The situation

Official figures revealed that consumer prices in Sri Lanka jumped a record 14% in December, topping the previous high of 11.1 the previous month.

The Census and Statistics Department said year-on-year inflation in December was the highest since the National Consumer Price Index (NCPI) was established in 2015. It said food inflation had also hit a record high of 21.5%, down from 16.9% in November. and 7.5% a year ago.

Sri Lanka’s foreign exchange reserves have also fallen since President Gotabaya Rajapaksa took office in 2019, from $7.5 billion to $3.1 billion at the end of December. The current figure is sufficient to finance less than two months of imports.

Supermarkets have been rationing powdered milk, sugar, lentils and other essentials for months with an official warning last month of new restrictions to feed those who need it most.

Unemployment is also very high in the country as COVID-19 has eaten away at the tourism industry, leaving thousands and thousands without jobs.

The Guardian reported that the situation has deteriorated so much that long queues have formed at the passport office as one in four Sri Lankans, mostly young and educated, say they want to leave the country.

Older citizens say conditions are reminiscent of the early 1970s, when import controls and low domestic production caused severe shortages of basic commodities and caused long queues for bread, milk and rice.

What caused the problem?

The coronavirus pandemic is one of the main reasons for the country’s debilitating economic situation. The pandemic has caused the closure of several tourism-related businesses, resulting in a massive loss of revenue.

But there are other factors at play.

Many experts say high government spending and tax cuts that erode state revenue have made the problem worse.

Disastrous planning and policy making has also hurt the Sri Lankan economy.

For example, Rajapaksa’s sudden decision in May to ban all fertilizers and pesticides and force farmers to switch to organic without warning brought the farming community to their knees, as many farmers, who had grown accustomed to using fertilizers and pesticides, suddenly found themselves without the means to produce. healthy crops or fight weeds and insects.

Heavy debts to China and other nations

One of the most pressing issues for Sri Lanka is its huge external debt and debt servicing burden, particularly vis-à-vis China.

It owes China more than $5 billion in debt and last year took out an additional $1 billion loan from Beijing to wean off its acute financial crisis, which is being paid in installments.

And it is not just China, but also other markets that the government and private sectors that Sri Lanka owes money to.

“We have high debt from three countries – China, Japan and India. The total outstanding debt for this year would be $6.9 billion,” said Prime Minister Mahinda Rajapaksa, the younger brother of President Rajapaksa, quoted in the newspaper. PTI report.

Opposition MP Harsha de Silva, who is also an economist, told parliament in December that the country’s foreign exchange reserves would be minus $437 million by January and total external debt service would be $4.8 billion between February and October 2022. be totally bankrupt”, Sri Lankan newspaper DailyMirror quoted him as saying.

De Silva said he was not trying to scare anyone, but it was a reality that “all imports will stop, the whole computer system will be stopped, including the Google map because we will not be able to not pay for it”.

The government said it was doing its best and would meet its commitments and also renegotiate its Chinese debts with Beijing.

Minister Ramesh Pathirana said they would try to settle past oil debts with Iran by paying them with tea.

Central Bank Governor Ajith Nivard Cabraal also said Sri Lanka would be able to repay its debts “transparently”.

Economic relief

The Sri Lankan government said it had a plan in place to deal with the economic crisis. On January 4, the Minister of Finance announced a $1.2 billion economic relief plan.

The relief measures include a special allowance of Rs 5,000 ($24) per month to 1.5 million government employees, pensioners and disabled soldiers from January 2022. Additionally, farmers, who had to facing a crop reduction of around 25-30% during the harvest season, would be offered subsidies.

India has also granted $400m to Sri Lanka under the SAARC Currency Swap Agreement and Asian Union Settlement Deferral of $515.2m for two months .

The Sri Lankan authorities are also considering a rescue plan from the International Monetary Fund.

With contributions from agencies

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