What’s Next for Sri Lanka’s Economy

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COLOMBO (AP) — Sri Lanka’s prime minister stated late last month, that its debt-laden economy has “collapsed”, as the country runs out money to buy food and fuel. It is short of money to import these necessities, and has defaulted on its debt. The country seeks help from China and India as well as the International Monetary Fund.

Prime minister Ranil Wickremesinghe took office in May and was emphasizing his monumental task in turning around an economy that he claimed was headed for “rock bottom.” Protesters stormed their homes and set fire one of them.

Sri Lankans have stopped eating because of fuel shortages, and are waiting in line for hours just to get their hands on the fuel they need. This is a stark reality in a country that had a rapidly growing economy and a comfortable middle class until this crisis.

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HOW SERIOUS ISN’T THIS CRISIS?

The government owes $51 trillion and cannot make interest payments or reduce the amount of its loans. The pandemic in 2019. and fears about security have strained tourism, which is an essential engine for economic growth. Its currency is now worth 80%,, making it more difficult to import and increasing inflation. According to data from the government, food prices have risen 57%,.

The result is that the country is on its way to bankruptcy with little money for imports of gasoline, milk and cooking gas, as well as toilet paper.

Political and financial corruption are also problems. They not only contributed to the country’s wealth squandering, but also made it difficult for Sri Lanka to get financial relief.

Anit Mokherjee is a policy fellow at the Center for Global Development and an economist. He said that any aid from the IMF/World Bank must be subject to strict conditions in order to ensure the aid doesn’t go sour.

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Mukherjee pointed out that Sri Lanka is located in the busiest shipping routes on the planet, and so it’s not possible for a country with such strategic importance to collapse.

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HOW DOES IT AFFECT REAL PEOPLE

Tropical Sri Lanka is normally not starving, but many people feel hungry. The U.N. World Food Program says nearly nine of 10 families are skipping meals or otherwise skimping to stretch out their food, while 3 million are receiving emergency humanitarian aid.

Doctors are turning to social media for critical medical supplies and equipment. Many Sri Lankans want passports so they can travel abroad in search for work. Three months of extra time has been granted to government workers to enable them to cultivate their own food.

In short, people suffer and want things to get better.

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WHY DOES THE ECONOMY WORK IN DIRE STRAITS LIKE ?

Economists believe that the crisis is caused by domestic factors like years of corruption and mismanagement.

A lot of public anger has been directed at President Rajapaksa’s brother Mahinda Rajapaksa, who was also the former Prime Minister. After weeks of protests against the government that turned violent, Rajapaksa resigned in May.

Conditions are in decline for several years. 2019, Easter bombings in churches and hotels claimed more lives than 260. Tourism, which was a major source of foreign currency, was devastated.

The government had to increase its revenue as the foreign debt for large infrastructure projects rose rapidly. But Rajapaksa instead pushed for the biggest tax cuts in Sri Lankan History. Although the tax cuts were reversed recently, it was only after Sri Lanka’s credit ratings were downgraded by creditors. This prevented Sri Lanka from borrowing further money, as its foreign reserves fell. The pandemic caused tourism to plummet again.

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In April 2021, Rajapaksa banned the import of chemical fertilizers. Farmers were taken by surprise when organic farming was promoted. This caused a decline in staple rice crop yields and drove prices up. Imports of other items that are considered luxuries were also banned to save money on foreign currency. The Ukraine war, however, has driven oil and food prices higher. Inflation was near 40% and food prices were up nearly 60% in May.

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WHY DOES THE PRIME MINISTER STATE THAT THE ECONOMY IS COLLAPSED

The stark statement made by Wickremesinghe in June, which is now in his sixth term of prime minister, threatened any trust in the economic state and did not reflect any new developments. As his government seeks IMF assistance and faces criticism for the slow progress since his election, the prime minister seemed to underline the difficulties facing it. This comment could have been made to purchase more time and support while he attempts to bring the economy back to its former glory.

The Finance Ministry said Sri Lanka had only $25 million in usable foreign reserves. This has rendered it unable to import or repay billions of debt.

The value of the Sri Lankan rupee to the U.S. Dollar has fallen to 360. This makes import costs even more expensive. Sri Lanka has suspended repayment of about $7 billion in foreign loans due this year out of $25 billion to be repaid by 2026.

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WHAT IS THE GOVERNMENT DOING IN RESPECT OF THE CRISIS??

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Sri Lanka’s financial situation has been rocky so far, with the help of $4 billion from India. In June, an Indian delegation visited Colombo to discuss further assistance. Wickremesinghe cautioned against the expectation that India would keep Sri Lanka on its feet for too long.

“Sri Lanka places last hope on IMF”, reads a headline from the Colombo Times in June. Wickremesinghe stated that he expects to reach a preliminary agreement with IMF later in the summer.

Sri Lanka also requested more assistance from China. Other countries like Australia, Japan and the U.S. have also provided support in excess of a hundred million dollars.

In June, the United Nations issued a global appeal for aid. The $6 billion needed to keep the country afloat in the coming six months is barely covered by the projected funding.

Wickremesinghe said in a recent interview to The Associated Press that he might consider purchasing more Russian oil at a steeply discounted price. This is to counter Sri Lanka’s current fuel crisis.

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