New Delhi: With inflation hitting a record high, food prices skyrocketing, and its coffers drying up, Sri Lanka’s economic crisis deepens, and the country faces a “humanitarian crisis”.
According to the World Bank’s estimate, 5 million people in Sri Lanka have fallen below the poverty line since the pandemic hit, which it described as “a shock equal to five years of progress”.
Rating agency Fitch last month downgraded Sri Lanka’s $26 billion foreign debt on fears of a sovereign default, according to an AFP report.
The Census and Statistics Department (CSD) said last month that the country’s economy contracted by 1.5 per cent in the third quarter of 2021.
There are fears that Sri Lanka may go bankrupt this year.
However, the government on Tuesday said the country will not default on its international debt as it announced a USD 1.2 billion economic relief package.
A PTI report said that Finance Minister Basil Rajapaksa said that Sri Lanka will duly pay the USD 500 million international sovereign bond due in a fortnight.
Sri Lanka’s economic crisis started after the whole world as well as this island country was hit by the epidemic. Tourism, which typically contributes more than 10 percent of the island nation’s GDP, was hit hard and had a massive impact.
Although the prolonged Covid crisis was an immediate trigger for the economic slowdown, there were other reasons as well. These include higher spending by President Gotabaya Rajapaksa’s government, tax cuts that have hit state revenues, forex reserves hit rock bottom, and massive loan repayments to China, as reported earlier this week. Was told by a report in The Guardian.
Earlier, as inflation began to rise after the Sri Lankan rupee crashed last year, leading to a spike in food prices, President Rajapaksa declared an economic emergency on August 30, 2021 to control the situation. The state of emergency under the Public Safety Ordinance was to prevent hoarding of essential commodities.
Four months down the line, even basic goods are no longer available to many, and even already affluent families are struggling to make a living.
The government had appointed a former army general as the commissioner of essential services, giving him the power to seize food stocks deposited by traders and retailers and ensure the sale of essential commodities at prices set by the government. , but little was done to lift it to the ground. People were taken out of their misery, the Guardian reports.
Is Sri Lanka heading towards bankruptcy?
China has a debt of more than $5 billion on Sri Lanka. According to reports, it is paying an additional $1 billion loan from Beijing last year in installments to help it tide over its acute financial crisis.
And it is not only China, but other markets in the public and private sectors that Sri Lanka owes money to.
“We have a lot of debt from three countries – China, Japan and India. The total outstanding for this year will be USD 6.9 billion,” FM Rajapaksa, the younger brother of President Rajapaksa and Prime Minister Mahinda Rajapaksa, told PTI. report good.
The heavy foreign debt burden on Sri Lanka is one of the main reasons for its economic crisis.
The report said that as of November, the country’s available foreign exchange reserves stood at just $1.58 billion, down from $7.5 billion when Rajapaksa became president in 2019.
Opposition MP Harsha da Silva, who is also an economist, told parliament in December that the country’s foreign exchange reserves would drop to minus $437m by January, and that total foreign debt services would reach $4.8 billion between February and October 2022. Go completely bankrupt,” Sri Lankan newspaper Daily Mirror quoted him as saying.
De Silva said he was not trying to scare anyone, but it was a reality that “all imports would stop, the whole IT system including Google Maps would shut down because we wouldn’t be able to pay for it”.
However, the government has always insisted that it can fulfill its obligations.
Minister Ramesh Pathirana has said that he will try to repay past oil debts with Iran with tea. As The Guardian reports, Sri Lanka plans to send $5 million worth of tea to Iran every month, in order to save “much-needed currency”.
Central Bank Governor Ajit Nivard Cabral has also said that Sri Lanka will be able to repay its debt “uninterruptedly”.
However, former central bank deputy governor WA Wijewardene told The Guardian that there is a high probability that the country will default on repayments, and this will have disastrous economic consequences.
“When the economic crisis deepens beyond redemption, it is inevitable that there will be a financial crisis in the country as well. Both would reduce food security by reducing production and failing to import due to lack of foreign exchange. At that point, it would be a humanitarian crisis,” he warned.
Meanwhile, the Finance Minister on Tuesday said that he has a plan. He said the new $1.2 billion (229 billion Sri Lankan rupees) economic relief package includes payment of special monthly allowances from Rs 5,000 to 1.5 million government employees, pensioners and disabled soldiers from January 2022.
impact of tourism loss
The tourism industry has been badly affected by the pandemic.
According to the World Travel and Tourism Council, more than 2 lakh people have lost their jobs in the travel and tourism sectors since the start of the pandemic.
There has been considerable loss of foreign revenue from this sector.
From over $7.5 billion in 2019, foreign exchange reserves had fallen to around $2.8 billion in July 2021, The Hindu reported in September last year.
The depreciating Sri Lankan rupee also pushed up food prices. Even for its basic food supply, the island nation relies heavily on imports.
Is there any food shortage?
Several media reports said that queues of people queuing up to buy essential goods could be seen across the country.
Prices of rice, pulses, bread, sugar, vegetables, fish have all gone up manifold, and many low-income families, especially daily wage earners, have long been complaining of being unable to afford them.
The situation is now such that even those in better condition are taking their daily food ration.
Quoting a man who worked as a driver in Colombo, The Guardian reports that he has now taken up another job and that his family now eats twice a day, not three.
He said that the grocery of his village now makes ten 100 gm packets out of 1 kg milk powder packets as no one can buy the whole packet.
The crisis was exacerbated by the government’s April ban on the use of chemical fertilizers in agriculture. The Rajapaksa government wanted to make Sri Lanka the first country in the world to have 100% organic agriculture. Caught unintentionally, farmers protested the move and warned that this dramatic, overnight change could seriously affect food production, as The Hindu reported last year.
The report, quoting tea expert Harman Gunaratne, said he believes this could cut production of tea and other crops by half and make the food crisis worse than the current crisis.
The report said that tea growers had warned of a 50 per cent drop in production.
Although the government made a U-turn in late October, it created a new problem for farmers – no help to cover the high cost of imported fertiliser, The Guardian reported.
“The government does not have money for fertilizer subsidy. Many of us farmers are reluctant to invest money because we don’t know if we will make any profit,” said farmer Ranjit Hulugale.
How the government has responded to the economic crisis
Speaking in parliament in December, MP de Silva said the “only solution” to deal with the crisis was to seek aid from the International Monetary Fund (IMF).
He said that domestic solutions will not help, and only the IMF can revive the country’s economy.
The then Agriculture Secretary Udit Jaisinghe also told reporters in late December that officials may have to seek foreign aid to help feed the needy.
“We may have to borrow grains like corn from friendly countries and think about rationing food to feed the mothers and the sick. Others may have to make sacrifices,” he said, hours before being replaced. by another officer,
AFP reported that President Rajapaksa’s office did not explain why he was sacked.
Meanwhile, the central bank appealed for foreign exchange, including loose changes that people can have after returning from foreign trips.
It barred traders from exchanging more than 200 Sri Lankan rupees for one US dollar early last year, and also barred traders from entering forward currency contracts.
Since then the government has been taking temporary relief measures to ease the situation.
In early December, Finance Minister Basil Rajapaksa visited India and held talks with his Indian counterpart Nirmala Sitharaman and India’s Foreign Minister S Jaishankar.
A total of $1.9 billion in aid was reportedly discussed, in addition to a $500 million line of credit for fuel and another $400 million to be swapped out.
Similar talks were also held with China and Bangladesh.
Regarding debt obligations, the Finance Minister said on Tuesday that International Sovereign Bond (ISB) holders would be invited for talks again. “We will have to repay USD 1,000 million in July, asked if they would be willing to reinvest,” PTI quoted Tulsi Rajapaksa as saying.
He also said that farmers facing crop losses of around 25-30 per cent this season would be offered subsidy, and each family in the plantation area would get 15 kg of wheat every month.
Rajapaksa assured that the relief package would not contribute to inflation any further, and that there would be no new taxes.
Regarding seeking bailout package from IMF, the minister said that the government has not taken any decision on it yet.
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