Sri Lanka battling worst economic crisis since 1948

Colombo: Sri Lanka, whose economy is in the doldrums, has sought an additional credit line of $1.5 billion from India to import essentials. This is on top of the $1 billion support that was extended by India to help pay for critical imports.

The country is struggling to pay for essential imports after its foreign exchange reserves saw a 70 percent drop in two years. Short supply of fuel, skyrocketing food prices, daily power cuts have fuelled protests against the Sri Lankan government.

International rating agencies have downgraded the country’s credit ratings, with many experts believing that it will not be able to service its $51 billion sovereign debt this year.

COVID-19 pandemic that affected the tourism sector, ill-timed tax cuts, weak government finances, and skyrocketing inflation, impacting foreign remittances are some of the main factors behind Sri Lanka’s present economic crisis.

Sri Lanka’s foreign currency reserves nosedived 70 percent since January 2020 to around $2.3 billion by February, which is a fall of $779 million from December 2021. It faces debt payments of $4 billion in the rest of this year, one of which is $1 billion in the form of a sovereign bond that matures in July. Its reserves are enough to only pay for about a month’s worth of imports, indicating a fall in essential commodities such as fuel, food, and medicines.

This did not happen overnight. This was a long time in the making. The Sri Lankan economy had sustained structural problems for several years. Its foreign exchange reserve increased due to borrowing of foreign currencies and not because of the export of goods and services.

In 2019, the Sri Lankan government announced tax cuts, lowering the country’s revenue. During his presidential campaign, President Gotabaya Rajapaksa promised to cut 15 percent value-added tax by nearly half as well as abolish other taxes to boost consumption and growth.

Moreover, the Chinese loans of over $5 billion it banked on, were mostly for low-return projects such as the construction of ports, airports, and coal power plants.

New Delhi has indicated it would meet the request for the new credit line, to be used for importing essential items such as rice, wheat flour, pulses, sugar, and medicines. In addition to the credit lines, India this year extended a $400-million currency swap and a $500-million credit line for fuel purchases to Sri Lanka. (Business Today)

Image courtesy of (Photo courtesy: countercurrents.org)

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