Sri Lanka’s economic crisis is explained: how did the country end up in this situation, and who is assisting it?

Due to a significant lack of foreign money, Rajapaksa’s government has been unable to pay for basic imports, like fuel, resulting in power outages lasting up to 13 hours. Sri Lankans are also suffering from food shortages and rising inflation.

According to critics, the foundation of the crisis, which is the worst in decades, is economic mismanagement by successive governments, which established and maintained a dual deficit – a budget deficit as well as a current account deficit.

“Sri Lanka is a classic twin deficits economy,” according to a working paper published by the Asian Development Bank in 2019. “A country’s national expenditure exceeds its national revenue, indicating that its production of tradable products and services is insufficient.”

Sri Lanka to turn off street lights as economic crisis deepens | World News - Hindustan Times

However, massive tax cuts promised by Rajapaksa during his 2019 election campaign and implemented months before the COVID-19 pandemic, which wiped out swathes of Sri Lanka’s economy, have worsened the current catastrophe.

**

With the pandemic decimating the country’s vital tourism industry and foreign workers’ remittances, credit rating agencies downgraded Sri Lanka, virtually shutting it out of international capital markets.

As a result, Sri Lanka’s debt management program, which relied on access to those markets, fell apart, and the country’s foreign exchange reserves plunged by about 70% in just two years.

The decision by the Rajapaksa government to ban all chemical fertilizers in 2021, which was later reversed, harmed the country’s farm economy and resulted in a decline in the key rice production.

wiki2

 

What happens with Sri Lanka’s foreign debt?
The government had only $2.31 billion in reserves as of February, but it faces debt repayments totaling about $4 billion in 2022, including a $1 billion international sovereign bond (ISB) due in July. The Asian Development Bank, Japan, and China are among the other main lenders, with ISBs accounting for the highest share of Sri Lanka’s foreign debt at $12.55 billion.

The IMF warned last month in an assessment of the country’s economy that public debt had reached “unsustainable levels” and that foreign exchange reserves were insufficient to cover short-term debt obligations.

The International Monetary Fund (IMF) - ASEAN Scholarships
In a note late last month, Citi Research said that the IMF report’s conclusion and the government’s recent measures were insufficient to restore debt sustainability, strongly indicating the need for debt restructuring”.

Who is helping Sri Lanka?

Despite mounting concerns, Rajapaksa’s administration and the Central Bank of Sri Lanka (CBSL) have rebuffed requests from experts and opposition leaders to seek IMF assistance. However, with rising oil prices in the aftermath of Russia’s invasion of Ukraine in late February, the administration devised a strategy to approach the IMF in April.

An IMF official said on Thursday that the IMF will begin talks with Sri Lankan authorities about a prospective loan program in the “coming days.”

Sri Lanka depreciated its currency sharply before going to the IMF, fueling inflation and aggravating the suffering of the populace, many of whom are suffering from hardship and long lines.

In the meantime, Rajapaksa has requested support from China and India, mainly in the form of financial assistance.

sl

 

Wikimess

 

Related Posts

Nvidia AI Growth: Surpassing Apple to Top Global Brand Ranking 1

Nvidia, the California-based chipmaker, has recently surpassed Apple to become the world’s most valuable brand. This significant milestone is a testament to the company’s remarkable growth and success in the…

5 Worthiest Business Women in California – Discover Their Business, Early Life, Charities, Net Worth [2023]

Explore the remarkable journeys of California’s 5 most influential businesswomen in 2023. Learn about their businesses, early lives, philanthropic efforts, and current net worth. Dive into the compelling stories of…

You Missed

Best 5 South Asian travel destinations towards the end of the year

  • By wkadmin
  • October 2, 2024
  • 30 views
Best 5 South Asian travel destinations towards the end of the year

How Do People Around the World Celebrate International Children’s Day?

  • By wkadmin
  • September 30, 2024
  • 36 views
How Do People Around the World Celebrate International Children’s Day?

What Are the Top 7 Luxury Cruise Ships of 2024

  • By wkadmin
  • September 29, 2024
  • 31 views
What Are the Top 7 Luxury Cruise Ships of 2024

The Fascinating Evolution of Headphones: From Past to Present

  • By wkadmin
  • September 28, 2024
  • 40 views
The Fascinating Evolution of Headphones: From Past to Present

Popular Cultural food festival Around the World

  • By wkadmin
  • September 20, 2024
  • 50 views
Popular Cultural food festival Around the World

disreputable objects of pagan licentiousness

  • By wkadmin
  • September 16, 2024
  • 54 views
disreputable objects of pagan licentiousness