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Sri Lanka on the brink of bankruptcy

Sri Lanka’s economy is in dire straits with the World Bank reporting that an estimated 500,000 people have fallen bellow the poverty line since the start of the pandemic and with the price of basic goods skyrocketing.

Over the next 12 months, Sri Lanka is required to pay an estimated US$7.3 billion in domestic and foreign loans, including a US$500m international sovereign bond repayment in January. However, as of November, available foreign currency reserves were just $1.6 billion.

Responding to these figures opposition MP and economist Harsha de Silva warned that Sri Lanka “will be totally bankrupt”. He noted that by next January reserves would be -US$437m, while the total foreign debt to service would be US$4.8bn from February to October 2022.

In explaining Sri Lanka’s economic crisis, the Guardian notes that this has been “in part caused by the immediate impact of the COVID crisis and the loss of tourism but is compounded by high government spending and tax cuts eroding state revenues, vast debt repayments to China and foreign exchange reserves at their lowest levels in a decade”.

Sri Lanka has also suffered record-high inflation reaching 11.1% in November. This has been exacerbated by the government issuing money to pay off domestic loans and foreign bonds. The result has been people unable to afford basic necessities and forced to ration food.

The Guardian highlights that in responding to the crisis the Rajapaksa regime “declared Sri Lanka to be in an economic emergency, the military was given the power to ensure essential items, including rice and sugar, were sold at set government prices”. However, “it has done little to ease people’s woes”.

The Sri Lankan government is also coming under criticism for its disastrous fertiliser policy which was repealed in late October. Despite this farmers are continuing to struggle to cover the high costs of imported fertiliser without help.

“When the economic crisis deepens beyond redemption, it is inevitable that the country will have a financial crisis too […] Both will reduce food security by lowering production and failing to import due to foreign exchange scarcities. At that point, it will be a humanitarian crisis” warned former central bank deputy governor WA Wijewardena.

International relief

Responding to the crisis the government has requested credit lines and currency swaps for neighbouring countries such as India, China and Bangladesh, as well as loans to purchase petroleum from Oman. In settling their oil debts with Iran they are requesting to pay Iran with tea, sending them $5m worth of tea every month so as to save currency.

The Guardian warns that “these loans provide only short-term relief and have to be paid back quickly at high interest rates, adding to Sri Lanka’s debt load”.

A further issue has been Sri Lanka’s foreign debt, owing China over $5bn and taking an additional $1bn from Beijing to help with its acute financial crisis, which is being paid in instalments.

Tensions with Beijing have escalated following a diplomatic spat over Sri Lanka’s fertiliser policy.

Read more here: Chinese company pushes for economic sanctions on Sri Lanka

Read the Guardian article here.

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