Sri Lanka in Crisis: What’s behind the economic meltdown?

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admin March 23, 2022
Updated 2022/03/29 at 2:41 PM
Sri Lanka

Sri Lanka’s economic situation is quickly worsening, causing immense suffering for the country’s citizens. At least two senior citizens died while waiting in long queues to buy fuel; the price of cooking gas increased to LKR 4,199 (approximately 1,150); the price of widely used milk powder increased by LKR 600 per kg; authorities were forced to cancel school examinations for millions of students due to a paper shortage.

Why are prices skyrocketing, and why is there scarcity?

Sri Lanka is experiencing one of the biggest economic meltdowns in its history. The first wave of the pandemic in 2020 showed early and clear signs of distress when thousands of Sri Lankan labourers in West Asian countries were left stranded and returned jobless; garment factories and tea estates in Sri Lanka were unable to function as infections raged in clusters; thousands of young people lost their jobs in cities as establishments were abruptly sacked or shut down. All of the major industries that make money for the country, like exports and remittances, as well as tourism, were badly hit.

The absence of a coherent crisis response plan at the time, along with key policy moves last year—particularly the government’s rapid transition to organic farming—largely seen as “ill-advised,” exacerbated the situation. In August of last year, the government took emergency steps to get important food to people, even though there were a lot of restrictions on imports to save money. This led to market irregularities and rumours that people were hoarding food.

Fears of a sovereign default grew towards the end of 2021, as the country’s foreign reserves fell to $1.6 billion and repayment dates for external debts loomed. However, Sri Lanka has maintained a spotless record of the foreign debt payment. Nonetheless, without enough dollars to import necessities like food, fuel, and medicine, the year 2022 began on a difficult note, marked by further shortages and economic upheaval.

What is going on on the ground?

On a macroeconomic level, all indications are concerning. The Sri Lankan rupee, which the government devalued earlier this month, has dropped to roughly 265 versus the US dollar. Consumer price inflation is 16.8 percent, while the country’s foreign reserves were $2.31 billion at the end of February. Sri Lanka must repay roughly $7 billion in foreign debt this year while continuing to purchase necessities from its shrinking dollar account. This year, Sri Lanka will have to pay $22 billion in imports, which will leave the country with a $10 billion trade deficit. President Rajapaksa said this in a recent speech to the country.

For people, this means lengthy lines for fuel, a scarcity of cooking gas, dealing with protracted power outages in many areas, and difficulty getting medications for patients. Working-class families are cutting down on milk for their children, eating fewer meals, or going to bed hungry as a result of the situation.

Is there resistance?

Yes, residents as well as other segments of the political opposition are flocking to the streets to demand that President Rajapaksa step down. A lot of the media isn’t happy with the government, and social media sites are full of jokes and scathing criticism of the Rajapaksas.

What is the government’s position?

“This crisis was not created by me,” President Rajapaksa said, referring to the difficulties that arose as a result of the pandemic. Despite many experts arguing that IMF funding was the “sole choice” for the government, the establishment remained hesitant until recently, when growing demonstrations and criticism drove the government into a policy U-turn. Mr. Rajapaksa said that the government is currently in negotiations with the IMF to “find a means to pay down our yearly loan installments and sovereign bonds.” It remains to be seen how the IMF will assist Sri Lanka at this time, and to what degree its assistance will assist the government in dealing with the crisis. Colombo has also asked for help from other countries, such as India, in the form of loans, currency swaps, and credit lines for important imports.

How is India assisting?

Since January 2022, India has provided $2.4 billion in aid, including a $400 million RBI currency exchange, a $500 million loan deferment, and credit lines for importing food, fuel, and pharmaceuticals. A billion-dollar credit line was finalised during Finance Minister Basil Rajapaksa’s visit to New Delhi last week. First and foremost, the neighbourhood. India supports Sri Lanka. India has set up a credit line of $1 billion to help deliver important goods. “Key part of India’s help package,” said External Affairs Minister S. Jaishankar in a tweet.

China is also looking into Sri Lanka’s request for an extra $2.5 billion in aid, the Chinese Ambassador in Colombo said at a press conference. That’s in addition to the $2.8 billion Beijing has already given since the pandemic started.

In Sri Lanka, how is India’s help perceived?

The leadership has thanked India for the timely assistance, but there is growing scepticism in the Sri Lankan media and some sections about Indian assistance “being tied” to New Delhi’s signing of key infrastructure projects in the island nation in recent years—primarily the strategic Trincomalee Oil Tank Farm project; and the National Thermal Power Corporation’s recent agreement with the Ceylon Electricity Board to establish a solar power plant in Sampur, in Sri Lanka’s eastern Trincomalee.

The weekend publication The Sunday Times editorialised that New Delhi was engaging in “diplomatic blackmail,” while cartoonists represented Sri Lankan politicians exchanging critical energy projects for emergency financial aid from India. The Adani Group has been accused by the political opposition of entering Sri Lanka via the “back door,” skipping competitive bidding and due procedure.

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