Sri Lanka's Debt Default and Economic Crisis

After the country depreciated its currency last month ahead of talks with the International Monetary Fund (IMF) for a loan programme, the people of Sri Lanka are suffering from severe shortages and rising inflation. The South Asian country is gripped by violence and political chaos 13 years after a devastating civil war that had ended in a gruesome incident that killed tens of thousands of people. Mr Mahinda Rajapaksa, the ex-Prime Minister, delivered his resignation letter to his younger brother, President Gotabaya Rajapaksa, saying he hoped it would help settle the problem. However, the move is unlikely to appease government critics as long as the latter is in charge. Mr Ranil Wickremesinghe has been selected as the interim Prime Minister by the President, who stated in his first-ever broadcast address that Sri Lanka is in a very critical situation.

Reasons For the Crisis-

The ruling government's shortsightedness is to be blamed for the country's lack of foreign exchange reserves. Sri Lanka's state debt is around 110% of its GDP. In terms of the US dollar, the Sri Lankan rupee has hit an all time low. This is due to the government's massive tax cuts, impacting government income and budgetary policy. To finance the budget shortfall, the government began printing additional money, raising the country's inflation rate from 15.1% to 18.7%. On April 5, 2022, the Sri Lankan rupee was worth 299.95 US dollars. Experts believe that one of the country's declining foreign exchange reserves is the rising imports of critical items such as sugar, pulses, cereals, and medicines. [1] In 2019, the then-newly established administration that is the Rajapaksa government, vowed to resuscitate the Sri Lankan economy by lowering the value-added tax (VAT), arguing that a lower tax rate would attract more consumer spending, which would cover the deficit. However, the epidemic disrupted the cycle of rising consumer spending, resulting in the failure of VAT tax reduction.

President Gotabaya Rajapaksa promised a total conversion to organic farming in April 2021, prohibiting all chemical and inorganic fertilizers from replenishing the country's dwindling foreign exchange stockpile. The initiative rejected objections from scientists and farmers who warned of a probable collapse of agriculture, including a financial crisis owing to currency depreciation, which centred on the tea business. Chemical fertilizer imports account for a significant portion of the country's economy. This initiative had a detrimental impact on the economy, resulting in significant financial losses. The choice to transition to organic farming in the next decade was positive, but the abrupt change had a damaging consequence. The conversion of tea and other agricultural goods to organic farming resulted in reduced yields, resulting in a $425 million loss. Tea used to be a substantial export, accounting for 16.57% of total export revenue, but that is no longer the case. Then adding to that, after six months of being self-sufficient in rice production, Sri Lanka had to import rice. Sri Lanka is also experiencing a labour deficit. Malik Fernando, the head of the Tourism Skills Committee, stated in 2018 that the country requires 100,000 more tourism workers in the next three years. 

Debt And Default- 

The Sri Lankan government declared an economic emergency in September 2021, citing the deterioration of the economy and growing inflation due to high food costs. The pandemic and the tourist restrictions further reduced the country's income. This pushed Sri Lanka to the edge of bankruptcy, with foreign reserves plummeting to US$1.9 billion in March 2022, inadequate to cover US$4 billion in international debt commitments and a US$1 billion payment on an International Sovereign Bond (ISB) for the year. According to the National Consumer Price Index, the national inflation rate jumped to 17.5% in February 2022. Sri Lanka now has $2.3 billion in foreign reserves. This is inadequate to cover foreign debt commitments of $7 billion and the $1 billion payment due on the International Sovereign Bond (ISB) in 2022. 

Sri Lanka has accumulated $11.8 billion in debt through sovereign bonds (ISB), accounting for 36.4% of the country's external debt, during several borrowing cycles since 2007. With a 14.3% stake and $4.6 billion in loans, the Asian Development Bank (ADB) is in the second position. With each having given around $3.5 billion, Japan is at 10.9%, and China is 10.8%. Nations hold the debt like India and international organisations like the World Bank and the United Nations. Over the last decade, China has provided billions of dollars to Sri Lanka for infrastructure projects such as motorways, ports, an airport, and a coal power plant, mainly under its Belt and Road Initiative (BRI). [2]

Politics around Rajapaksa Brothers-

The Rajapaksa brothers face widespread rallies demanding their dismissal, which is a remarkable turn of events for Sri Lanka's most prominent political family. In 2009, the island's Buddhist-Sinhalese majority hailed Mahinda and Gotabaya Rajapaksa as heroes for ending a 30-year civil conflict with ethnic Tamil insurgents. Despite claims of war crimes, Mahinda, who was President at the time, managed the conclusion of the conflict, and Gotabaya, a military strategist whose harsh tactics helped smash the rebels, had widespread support. Following the Easter bombings in 2019, the family retook control with Gotabaya, who campaigned for President on a nationalist platform, winning over supporters who were disillusioned by the previous government's handling of the assaults. Critics have accused the Rajapaksas of depending extensively on the military to execute policies, introducing laws that erode independent institutions, and retaining a near-monopoly on decision-making. Three more Rajapaksa cabinet members served until early April when the whole government resigned due to the demonstrations. The protestors won a partial triumph with Mahinda's resignation recently. With the protests continuing, particularly outside the President's office, pressure on the President to resign has also increased.

Impact of the Crisis-

The citizens of Sri Lanka are facing a devastating hit of crisis. Due to shortages, the economic crisis has resulted in decreased usage of power, gasoline, and cooking gas. In an effort to save power, Finance Minister Basil Rajapaksa had requested all government entities to turn down all street lights at least till the end of March 2022. As a result of cooking gas shortages, about 1000 bakeries have closed. In recent months, long lines have formed in front of gas stations; police troops are allotted around some stations to prevent any outrage by the people. The gasoline scarcity was made worse by the rise in global oil prices. Inflation was 17.5% in February 2022. Food inflation increased by 24.7% year over year, while non-food products increased by 11%. [3]

Many hospitals and medical institutions appear to have halted regular procedures and limited the number of laboratory tests performed. Some of the state-run hospitals were said to be running low on life-saving drugs. The United Kingdom and Canada cautioned their citizens in March 2022 against Sri Lanka's present economic predicament. Following the deterioration of economic and political situations in Sri Lanka, India has seen a significant increase in international orders for textiles and tea goods, as India's export demand has surged dramatically. In January 2022, due to a lack of foreign reserves, the Sri Lankan High Commission in Nigeria and consulates in Germany and Cyprus were temporarily closed. Also, due to a lack of dollar reserves, the Sri Lankan embassy in Iraq, the Sri Lankan embassy in Norway, and the Sri Lankan consulate in Australia were all shut indefinitely in March 2022.

Conclusion- 

Since November, Sri Lanka has been downgraded by Moody's, Fitch, and Standard & Poor's due to debt default concerns. Some financial analysts suggest that Sri Lanka's debt should be restructured and repaid over three years. [4] This will save money and ease the strain on Sri Lankans who are experiencing shortages of imported items like milk powder, gas, and petrol. The Sri Lankan government has assured its citizens that adequate fuel will be available soon in the fuel stations, but the situation does not seem to improve. In order to boost the country's economy, Sri Lanka has to implement extensive structural economic changes. First, this can be made possible by establishing a stable government and popular leadership. The administration should take measures like focusing on more agricultural output, increased job prospects in non-agricultural industries, enhanced reform implementation to promote safer, more productive work, and greater access to public services and education. There needs to be enough investment in the tourism sector, especially after the pandemic. The government will also need to focus on training the workforce in agricultural, industrial and tourism fields. However, all of this boils down to the political and social stability of the nation. The people of this island country need a robust, reliable and popular government in power. 

Endnotes

[1] Explained: What led to Sri Lanka’s economic crisis, and who’s is helping? (2022, May 12). The Indian Express. https://indianexpress.com/article/explained/sri-lanka-economic-crisis-explained-7849208/

[2] Explained: Everything you want to know about Sri Lanka’s mounting debt problems. (n.d.). Business Today. Retrieved May 17, 2022, from https://www.businesstoday.in/latest/economy/story/explained-everything-you-want-to-know-about-sri-lankas-mounting-debt-problems-319373-2022-01-17

How Sri Lanka spiralled into crisis and what happens next. (n.d.). Retrieved May 17, 2022, from https://www.aljazeera.com/news/2022/5/11/how-sri-lanka-spiralled-into-crisis-and-what-happens-next

[4] How to Help End Sri Lanka’s Economic Crisis. (2022, May 9). BORGEN. https://www.borgenmagazine.com/end-sri-lankas-economic-crisis/

Pic Courtesy-Keith Luke at unsplash.com

(The views expressed are those of the author and do not represent views of CESCUBE.)