Sri Lanka struggles to stay afloat
Rising debt, shrinking foreign reserves, dismal fiscal and the pandemic are sinking the island nation Sri Lanka needs to make nearly $7 billion in payments on foreign loans this year. And its foreign reserves are dwindling fast. It faces huge debt obligations and is grappling with its worst economic meltdown since independence in 1948. The […]
Rising debt, shrinking foreign reserves, dismal fiscal and the pandemic are sinking the island nation
Sri Lanka needs to make nearly $7 billion in payments on foreign loans this year. And its foreign reserves are dwindling fast. It faces huge debt obligations and is grappling with its worst economic meltdown since independence in 1948. The country’s struggle to pay for imports has caused shortages of medicine, fuel, milk powder, cooking gas and other essentials.
Soldiers were deployed after angry crowds blocked the main artery in Colombo and held up traffic for hours because they were unable to buy kerosene. People waiting in long queues to get fuel has become a regular sight. Even school exams for about 4.5 million students were postponed indefinitely due to acute paper shortage. “Schools cannot hold tests as printers are unable to secure foreign exchange to import necessary paper and ink,” the Western Province’s department of Education stated.
Residents are enduring daily power cuts due to a shortage of fuel to operate generating plants and dry weather has sapped hydropower capacity. When the Central Bank allowed the local currency to free float earlier this month, the currency slumped to 265 rupees to the dollar, causing a sharp increase in prices. Prices were up more than 15% year-on-year in February, a 13-year high. Food prices almost doubled from what it was six months ago at 25%. Many Sri Lankans are also trying to flee to neighbouring India.
Sri Lanka was pushed into debt by civil war, and war-related corruption has seen the debt increase. Repaying China for exorbitant infrastructural projects, debts owed to non-Chinese entities, and corruption that persisted through the pandemic have all contributed to a severe balance of payments crisis.
As per a report in the Financial Times, the Sri Lankan Economic disaster was partly manmade as pointed out by its former Central Bank Deputy Governor Wijewardana, who blamed the government for making serious policy errors when it announced an unsolicited, attractive tax concession for income taxpayers. This led to a double whammy: inflationary pressure in the domestic economy and depletion of foreign reserves.
Import Economy
Sri Lanka’s economy depends heavily on tourism and trade and the pandemic has been disastrous, with the government estimating a loss of $14 billion over the last two years. The economy is estimated to have contracted 1.5% in July-September 2021, according to the country’s central bank. The county is heavily dependent on imports even for its daily essentials such as sugar, pulses, cereals and pharmaceuticals.
The tourism industry accounts for 10% of the country’s GDP. The 2019 serial blasts across Colombo during Easter had already hit the sector hard and Covid only worsened it. Countries advising their citizens against travelling to the island nation resulted in a foreign exchange crisis. Fewer dollar means the country is unable to import.
Bad Fiscal Policy
Dwindling reserves made President Gotabaya Rajapaksa ban the import of motor vehicles in 2020. Vehicles account for about 70% of the imported fuel. And in April 2021, he banned chemical fertilizers, saving around US$400 million while appealing to nationalist sentiment by claiming locally-produced organic fertilizer was better. The country’s two million farmers were left in the lurch. The decision led to widespread farmers’ protests.
Teachers also went on strike, citing rampaging inflation, made worse by the government recklessly printing money. Earlier, village-level groups avoided challenging Rajapaksa governments given their mutual commitment to Sinhalese Buddhist supremacy.
Rampant corruption is another major factor undermining Sri Lanka. Writes Neil DeVotta, Wake Forest University, North Carolina, in 360 info: “Family, friends and allies of the Rajapaksas have profited from lofty, well-paying state-funded positions that require little work. Today Gotabaya, Mahinda, two other brothers, and Mahinda’s son oversee departments and agencies that collectively control nearly 70% of the island’s budget. Once feared by the country’s most powerful, the Rajapaksa family now see their effigies hit and burned in the street, by many who once voted for them. Although their ethno-nationalist government sits securely in power, there is mounting resistance to a regime that has driven Sri Lanka into economic crisis amid continuous corruption. …Chinese-funded projects have played a large role in promoting Rajapaksa, just as Chinese state support for the family has aided their authoritarianism.”
According to the World Bank, five lakh people in Sri Lanka have fallen below the poverty line since the pandemic struck, which it described as a “huge setback equivalent to five years’ worth of progress”.
Failing Steps
Ban on chemical fertilizers hit agricultural production. Tea, the country’s most famous export, which earned $1.2 billion last year, isn’t getting new buyers due to a threefold jump in the cost of production. Russia is one of its largest importers of tea, and the war there has aggravated the situation.
Sri Lanka, long self-sufficient in rice production, has been forced to import $450 million worth of rice even as domestic prices for this staple of the national diet surged by around 50%, according to a report in Foreign Policy. Falling production made the government partially lift its fertilizer ban on key export crops, including tea, rubber, and coconut.
Chinese Burden
Sri Lanka’s foreign reserves are also shrinking because of construction projects built with Chinese loans that are not making money. China loaned the country money to build a seaport and airport in the southern Hambantota district and a wide network of roads. Central Bank figures show that current Chinese loans to Sri Lanka total around $3.38 billion, not including loans to state-owned businesses, which are accounted for separately and thought to be substantial.
China’s ambassador to Sri Lanka, Qi Zhenhong, said since the outbreak of Covid in 2020, China has provided $2.8b in financial help to Sri Lanka. “Our aim is to help Sri Lanka overcome the current difficulties,” he said.
The country is also seeking to negotiate a new loan with China. The Hambantota Port, part of China’s Belt and Road Initiative, is widely viewed as an example of China’s over-ambitious infrastructure drive. Sri Lanka borrowed heavily to build the port, couldn’t repay the loans, and then gave China a 99-year lease for debt relief.
Reemerging Ties with India
India recently extended a $1 billion credit line to Sri Lanka to be used for importing food, medicines and other essentials from India. Earlier it gave a $500 million oil line of credit; currency swap of $400 million; deferral of $515 million under Asian Clearance Union; 40,000 MT of fuel on credit; 1,00,000 Rapid Antigen Test kits and supply of 1,000 tonnes of liquid medical oxygen.
India is also expected to extend a food and health security package to Sri Lanka on an urgent basis, along with an energy security package and currency swap, and also push Indian investments.
State-owned NTPC also signed an agreement for setting up a solar plant in Sampur in the eastern province of Trincomalee, while the Adani group has signed up for another wind/solar project in the Mannar and Pooneryn areas of northern Sri Lanka. Indian Oil’s subsidiary Lanka India Oil Corporation and Ceylon Petroleum have signed an agreement to jointly develop the Trincomalee Oil Tank Farm. Delhi is also pushing for joint development of the Palaly airport and Kankesanthurai harbour in the northern Jaffna peninsula.
Umesh Moramudali, University of Colombo, reasons in The Diplomat: “ The likely reason for the Sri Lankan government opting to seek financial assistance from China and India is their unwillingness to carry out the economic reforms that are part of an IMF programme. … seeking IMF assistance would mean revising most of the economic policies of the Rajapaksa government and carrying out economic reforms. Although most of these policy changes and economic reforms are the need of the hour, some of these reforms often have a high political cost. Such a policy revision would also mean an acknowledgement from the government to say: ‘We made a big blunder. We should not have reduced taxes.’”
At IMF’s Door
On March 17, as his brother Basil Rajapaksa arrived in New Delhi, President Gotabaya Rajapaksa said in an address to the nation that the country will seek a bailout from the IMF, which says the government’s foreign debt burden of $51 billion is unsustainable Rajapaksa said his government was in discussions with the International Monetary Fund, other agencies and countries on deferring loan repayments and requested people’s support for limiting electricity and fuel consumption.
The government’s decision to deal with the IMF marks a policy shift after it had resisted calls to seek the agency’s help, arguing that asking international financial institutions for assistance could bring along conditions detrimental to the country’s interests.
Political observers say that in just over two years, Sri Lanka’s first family has presided over a series of crises mostly of its own making. As former Premier Ranil Wickremesinghe put it, “The Government decided to cancel several investment projects with India and Japan, these must be resolved. Similarly, this Government has brought about issues with China that must be addressed. Sri Lanka’s issue with the EU is related to the Human Rights Council in Geneva. Those concerns must be dealt with. If the Government can do so, then we will see increased confidence in the country that will encourage greater levels of foreign investment.”
Gotabaya will continue to be the President till 2024 and the opposition protests are unlikely to loosen his grip on power. Any delay in securing an IMF agreement may bring the country one step closer to being a defaulter.
(With Inputs from Agencies)
Now you can get handpicked stories from Telangana Today on Telegram everyday. Click the link to subscribe.
Click to follow Telangana Today Facebook page and Twitter .
