Sri Lanka’s economic crisis deepens and the government is taking tough measures, including imposing a state of emergency, to deal with protests over the country’s worst financial crisis in decades. The crisis is not sudden but it was simmering for a long time and rating agencies had warned about it earlier also.
The government has taken strong steps to deal with the economic crisis and to deal with the protests over it. It has imposed a 36-hour curfew, declared a ‘state of emergency’ to halt protests, banned social media and even turned off street lights to save electricity.
The island nation with a population of 22 million people has blacked out for 13 hours a day as the government does not have enough foreign exchange reserves to pay for fuel imports. “We have already instructed officials to switch off street lights across the country to help save electricity,” Power Minister Pavitra Vanniarachi said.
The current economic crisis is the result of economic mismanagement by successive governments and has been intensified by the deep tax cuts undertaken by Sri Lankan President Gotabaya Rajapaksa during the 2019 elections. Currently, Sri Lanka is unable to pay for essential imports, including oil, which led to power cuts for up to 13 hours.
foreign exchange reserves
Sri Lanka’s foreign exchange (foreign exchange) reserves have declined by 70 per cent in the last two years to February at USD 2.3 billion, thus affecting the country’s ability to pay for imports. During the rest of the year, it has made loan payments of about USD 4 billion.
rising inflation
The country’s inflation rate is at a high level. Its retail inflation stood at 17.5 per cent in February, the highest level since 2015, driven by rate hikes in both food (24.7 per cent) and non-food (11 per cent) categories. Inflation in January 2022 was 16.8 per cent.
Inflation has been further exacerbated by Sri Lanka last month devaluing its local currency and imposing import limits on hundreds of items disrupting value chains and pushing consumer prices to already high levels.
job losses
Following the COVID-19 pandemic, Sri Lanka’s tourism industry was badly hit, adversely affecting its foreign exchange reserves and causing job losses. It also increased the number of poor living in the country. According to a World Bank report, the share of the poor in the country was projected to increase to 11.7 per cent during 2020, compared to 9.2 per cent in the previous year, based on a daily income of USD 3.20.
aid to sri lanka
On March 17, India extended a USD 1 billion line of credit to Sri Lanka after an agreement was signed between the two governments last month during the visit of Sri Lankan Finance Minister Basil Rajapaksa. A consignment of 40,000 metric tonnes of diesel from India reached Sri Lanka on Saturday, the fourth such assistance from New Delhi. Traders here also loaded about 40,000 tonnes of rice for shipment to Sri Lanka in a major food aid.
Sri Lanka’s government is preparing for talks with the International Monetary Fund (IMF) amid concerns over the country’s ability to repay foreign debt. The country has devalued its currency before the talks.
early warning
The Asian Development Bank called Sri Lanka a “twin deficit economy” in 2019. “Twin deficits indicate that a country’s national expenditure exceeds its national income, and that the production of tradable goods and services is inadequate,” it had said.
In December 2021, rating agency Fitch downgraded Sri Lanka’s sovereign rating from ‘CCC’ to ‘CC’. It said the likelihood of default in the coming months has increased in view of the country’s deteriorating external liquidity position due to a fall in foreign exchange reserves.
The agency said the downgrade reflects its view of Sri Lanka’s growing likelihood of a default event in the coming months in light of its deteriorating external liquidity position, which will increase its reserves in fixed foreign exchange reserves against higher foreign debt payments and limited financing flows. Declining is underlined. “The severity of the financial stress is illustrated by increased government-bond yields and downward pressure on the currency.”
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