Financial Crisis in Sri Lanka

Sri Lanka

Over the past decade, the Sri Lankan government has borrowed vast sums of money from foreign lenders to fund public services. Sri Lanka had to fall back on its foreign exchange reserves to pay off government debt, shrinking its reserves from $6.9 billion in 2018 to $2.2 billion this year. This impacted imports of fuel and other essentials, which sent prices soaring. Topping all that, the government in March floated the Sri Lankan rupee — meaning its price was determined based on the demand and supply of foreign exchange markets.

Debt in billions due to years of accumulated borrowings, record inflation, lack of foreign currency, crucial sectors witnessing a sharp fall in demand thanks to the pandemic, and the alleged government mismanagement are among the reasons that have dragged Sri Lanka into not just an unprecedented economic crisis but also a massive political turmoil.

As of February, the country was left with only $2.31 billion in its reserves but faces debt repayments of around $4 billion in 2022, including a $1 billion international sovereign bond (ISB) maturing in July. ISBs make up the largest share of Sri Lanka’s foreign debt at $12.55 billion, with the Asian Development Bank, Japan and China among the other major lenders.That move appeared aimed at devaluing the currency to qualify for a loan from the International Monetary Fund (IMF) and encourage remittances.

The country owes more than $51bn (£39bn) to foreign lenders, including $6.5bn to China, which has begun discussions about restructuring its loans.

The Sri Lankan government declared in April 2021 that the country is in its worst economic crisis in 73 years. It has experienced an unprecedented level of inflation and an increase in prices of basic commodities, devaluation of its currency, near-depletion of its foreign exchange reserves, supply shortages in certain food items, and life-saving medicines and medical equipment, shortages in oil and gas, and sociopolitical unrest.

The ongoing economic crisis is thus two-fold. The first constitutes the foreign exchange crisis – the Sri Lankan economy’s foreign reserves were decimated as a result of the ongoing pandemic and travel restrictions, but also substantial uncertainty over consumer confidence and the state of the economy. The second is the debt crisis – the Sri Lankan state is fundamentally incapable of repaying the vast loans it has taken out, from countries including, but not limited to, China, but also from international markets.

“Sri Lanka is a classic twin deficit economy,” said a 2019 Asian Development Bank working paper. “Twin deficits signal that a country’s national expenditure exceeds its national income, and that its production of tradable goods and services is inadequate.”

In a review of the country’s economy released last month, the IMF said that public debt had risen to “unsustainable levels” and foreign exchange reserves were insufficient for near-term debt payments.

In a note late last month, Citi Research said that the IMF report’s conclusion and the government’s recent measures were insufficient to restore debt sustainability, strongly indicating the need for debt restructuring”.

Critics say the roots of the crisis, the worst in several decades, lie in economic mismanagement by successive governments that created and sustained a twin deficit – a budget shortfall alongside a current account deficit.

Individuals and groups vocal against the government have put forward numerous allegations of corruption, mismanagement of funds, and inappropriate political motivation. Government opposition and several economists and analysts have argued that one of the major causes of the Sri Lanka economic crisis can be attributed to the unfavorable political climate characterized by anomalies, incompetence, crony capitalism, and protectionism.

It should be noted that the heavy presence of the Military in the North and East is not needed as there is no war going on. The Police can easily manage the situation

A former Indian Army officer, Colonel (retd.) R. Hariharan, who was with the Indian Peace Keeping Force (IPKF) in Sri Lanka, and with whom The Hindu shared the information for an assessment, said the manner in which the troops were spread out in the entire North and East was suggestive more of an Army in ‘operational readiness’ than in post-conflict repose.

  Kumarathasan Rasingam – Secretary, Tamil Canadian Elders for Human Rights Org.

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