SRI LANKA’S ECONOMIC COLLAPSE

Why in news? : Island nation’s debt-laden economy had “collapsed” and was heading for “rock bottom”. Both PM Wickremesinghe and President Gotabaya Rajapaksa agreed to resign amid mounting pressure from protesters who had stormed the nation.

Problem in Sri Lanka: Short of cash to pay for imports of such necessities and already defaulting on its debt, Sri Lanka has been seeking help from neighbours  India and China and from the International Monetary Fund.

Why is the economy in such a dire straits? : Crisis stems from domestic factors like years of mismanagement and corruption. The government needed to boost its revenues as foreign debt for big infrastructure projects soared, but instead it pushed through the largest tax cuts. The tax cuts were recently reversed, but only after creditors downgraded Sri Lanka’s ratings, blocking it from borrowing more money as its foreign reserves sank. Tourism flat lined again during the pandemic.

It banned imports of chemical fertilizers. The push for organic farming caught farmers by surprise and decimated staple rice crops, driving prices higher. To save on foreign exchange, imports of other items deemed to be luxuries also were banned. Meanwhile, the Ukraine war has pushed prices of food and oil higher. Inflation was near 40% and food prices were up nearly 60%.

What is the government doing about the crisis?:

Mainly supported by $4 billion in credit lines from India..

The government is in negotiations with the IMF on a bailout plan.

Sri Lanka has also sought more help from China. Other governments like the US, Japan and Australia have provided a few hundred million dollars in support.

Earlier in June, the United Nations launched a worldwide public appeal for assistance. So far, projected funding barely scratches the surface of the $6 billion the country needs to stay afloat over the next six months.

To counter Sri Lanka’s fuel shortage, they would consider buying more steeply discounted oil from Russia.

What are the symptoms of its economic collapse? :Sri Lanka had only $25 million in usable foreign reserves. That has left it without the wherewithal to pay for imports, let alone repay billions in debt.

Meanwhile, the Sri Lankan rupee has weakened in value to about 360 to the US dollar. That makes costs of imports even more prohibitive. Sri Lanka has suspended repayment of about $7 billion in foreign loans due this year out of $ 25 billion to be repaid by 2026.

How does it affect the people? : Tropical Sri Lanka normally is not lacking for food, but people are going hungry. The UN World Food Program says nearly nine of 10 families are skipping meals or otherwise skimping to stretch out their food, while 3 million are receiving emergency humanitarian aid.

Doctors have resorted to social media to try to get critical supplies of equipment and medicine. Growing numbers of Sri Lankans are seeking passports to go overseas in search of work. Government workers have been given an extra day off for three months to allow them time to grow their own food.