Sri Lanka Crisis : Foreign Debt And Remedies 2022
Sri lanka crisis :
- The ongoing 2019–2022 Sri Lankan economic crisisis characterized by economic mismanagement, a rise in external debt, depleting foreign exchange reserves, a weakened currency, and rising prices.
- The crisis has been caused by multiple compounding factors such as tax cuts, money creation, a nationwide policy to shift to organic or biological farming as well as events such as the Easter bombings in 2019 and the impact of the COVID-19 pandemic.
- By March-April 2022, the ruling coalition had lost its majority and political turmoil increased including the resignations of cabinet ministers.
- The shift to organic farming was reversed following a drop in output and food shortages
Financial position of sri lanka :
- Sri Lanka is on the brink of sovereign default, as the remaining foreign reserves of US$1.9 billion as of March 2022 would not be sufficient to pay the country’s foreign debt obligations for 2022, with US $4 billion to be repaid.
- An International Sovereign Bond repayment of US$1 billion is also due to be paid by the government in July 2022. According to Bloomberg, Sri Lanka has total due repayment of US$ 8.6 billion including both local debt and foreign debt.
- In April 2022, the Sri Lankan rupee had plunged to a record low to become the worst performing currency in the world with US$1 trading at Rs. 315.
Foreign debt :
- Since 2010, Sri Lanka’s foreign debt more than doubled between 2010 and 2020.
- While foreign debt was about 42% of the GDP in 2019, it rose to 119% of its GDP in 2021.
- By the end of 2022, the country is due to pay USD 4 billion to debtors, whereas in April 2022, government reserves amounted for USD 2.3 billion.
What has the government said?
- President Rajapaksa issued a statement April 4 but did not directly address the resignations, only urging all parties to “work together for the sake of all the citizens and future generations.”
- “The current crisis is a result of several economic factors and global developments,” the statement read. “As one of the leading democratic countries in Asia, solutions should be found to this within a democratic framework.”
- Later that day, when announcing the cabinet reshuffle, the President’s office released a statement saying Rajapaksa “sought the support of all the people to overcome the economic challenge faced by the country.”
- On April 6, Chief Government Whip Johnston Fernando said during a parliament session that Rajapaksa will not resign “under any circumstances.” Fernando is a member of the ruling coalition and is seen as a close ally to the President.
- Previously, Rajapaksa has said he is attempting to resolve the issue, saying in an address to the nation last month that “this crisis was not created by me.”
- On April 1, Prime Minister Mahinda Rajapaksa — the President’s elder brother and a former President himself — told CNN it was wrong to say the government had mismanaged the economy. Instead, Covid-19 was one of the causes, he said.
Impact :
Electricity and fuel shortages:
- The economic crises has resulted in declines in electricity, fuel and cooking gas consumption, resulting from shortages. Finance Minister Basil Rajapaksa urged all government authorities to switch off all street lights at least up until the end of March 2022 in an attempt to conserve electricity.
Inflation
- As of February 2022 inflation was 17.5%.
- The year on year increase inflation for food was 24.7% while non-food items saw a 11% rate.
- The year on year change (Feb 2021 to Feb 2022) for local red chilis increased by 60%, local potato’s by 74.8% and Nadu rice by 64%.
Education
- In March 2022, several schools in Sri Lanka announced that their term/mid-year examinations would be postponed indefinitely, due to paper shortages throughout the country mainly triggered by the lack of foreign reserves to import paper.
Health
- On 29 March, all scheduled surgeries at the Peradeniya Teaching Hospital were suspended due to a shortage of medicines.
- Other state-run hospitals were also reported to be running out of life-saving medicines.
- On 8 April, Medical Council of Sri Lanka issued a warning that there would be catastrophic number of deaths, which is likely to be in excess of the combined death toll of COVID, Tsunami and the Civil War, unless urgent replenishment of supplies is made, within a matter of weeks.
Tourism
- In March 2022, the United Kingdom and Canada warned their travellers to be aware of the current economic situation in Sri Lanka
Exports
- The Economic Times of India reported that due to the prevailing economic crisis in Sri Lanka; leading textile brands including Zara, Mango and H&M have diverted their attention from Sri Lanka to India in order to place their orders.
Entertainment and sports
- Leading internet protoccol television service provider in Sri Lanka, SLT PEO TV has temporarily stopped and suspended foreign channel telecast operations due to payment difficulties owing to dollar crisis and economic crisis in Sri Lanka.
Diplomatic relations
- In January 2022, Sri Lankan High Commission in Nigeria, consulates in Germany and Cyprus were temporarily closed down due to lack of foreign reserves.
- In March 2022, Sri Lankan Embassy in Iraq, Sri Lankan Embassy in Norway and consulate in Australia were also closed due to lack of dollar reserves.
Remedies :
- Sri Lanka is now seeking financial support from the IMF and turning to regional powers that may be able to help.
- During last month’s address, President Rajapaksa said he had weighed the pros and cons of working with the IMF and had decided to pursue a bailout from the Washington-based institution — something his government had been reluctant to do.
- Sri Lanka has also requested help from China and India, with New Delhi already issuing a credit line of $1 billion in March — but some analysts warned that this assistance might prolong the crisis rather than solve it.
- There is still much uncertainty around what comes next; national consumer price inflation has almost tripled, from 6.2% in September to 17.5% in February, according to the country’s central bank. And Sri Lanka has to repay about $4 billion in debt over the rest of this year, including a $1 billion international sovereign bond that matures in July.
- And the situation has prompted alarm from international observers. Speaking at a news briefing on April 5, Liz Throssell, a spokesperson for the UN High Commissioner for Human Rights, expressed concern over Sri Lanka’s official response.
- The government’s curfew, social media blackout, and police action in breaking up the protests could prevent or discourage people from expressing their grievances, she said, adding that these measures “should not be used to stifle dissent or hinder peaceful protest.” She said the UN was watching “closely,” and warned against “the drift to militarization and the weakening of institutional checks and balances in Sri Lanka.”
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