EXPLAINER International

Sri Lanka’s aggravating economic crisis

In limbo: A child waiting to buy kerosene with his mother at a fuel station in Colombo, Sri Lanka on March 18, 2022.

In limbo: A child waiting to buy kerosene with his mother at a fuel station in Colombo, Sri Lanka on March 18, 2022. | Photo Credit: REUTERS

The story so far: Sri Lanka’s economic crisis is aggravating rapidly, putting citizens through enormous hardship. Over the weekend, at least two senior citizens died while waiting in long queues to buy fuel; the price of cooking gas spiked to LKR 4,199 (roughly ₹1,150), the price of the widely used milk powder shot up by LKR 600 a kg, and authorities were forced to cancel school examinations for millions of students, due to a shortage of paper.

Why are prices soaring and why is there a shortage?

Sri Lanka is in the grips of one of its worst economic meltdowns in history. The first wave of the pandemic in 2020 offered early and sure signs of the distress — when thousands of Sri Lankan labourers in West Asian countries were left stranded and returned jobless; garment factories and tea estates in Sri Lanka could not function, as infections raged in clusters, and thousands of youth lost their jobs in cities as establishments abruptly sacked them or shut down. It meant that all key foreign exchange earning sectors, such as exports and remittances, along with tourism, were brutally hit.

The lack of a comprehensive strategy to respond to the crisis then, coupled with certain policy decisions last year — including the government’s abrupt switch to organic farming —widely deemed “ill-advised”, further aggravated the problem. In August last year, the government declared emergency regulations for the distribution of essential food items, amid wide import restrictions to save dollars which in turn led to consequent market irregularities, and reported hoarding.

Fears of a sovereign default rose by the end of 2021, with the country’s foreign reserves plummeting to $1.6 billion, and deadlines for repaying external loans looming. But Sri Lanka managed to keep its unblemished foreign debt servicing record. All the same, without enough dollars to import essentials such as food, fuel, and medicines, the year 2022 began on a rather challenging note, marked by further shortages and an economic upheaval.

What is happening on the ground?

At the macro-economic level, all indicators are worrisome. The Sri Lankan rupee, that authorities floated this month, has fallen to nearly 265 against the U.S. dollar. Consumer Price inflation is at 16.8% and foreign reserves stood at $2.31 billion at the end of February. Sri Lanka must repay foreign debt totalling nearly $7 billion this year and continue importing essentials from its dwindling dollar account. In a recent address to the country, President Rajapaksa said Sri Lanka will incur an import bill of $22 billion this year, resulting in a trade deficit of $10 billion.

For citizens, this means long waits in queues for fuel, a shortage of cooking gas, contending with prolonged power cuts in many localities and struggles to find medicines for patients. In families of working people, the crisis is translating to cutting down on milk for children, eating fewer meals, or going to bed hungry.

Is there resistance?

Yes, both citizens and different segments of the political opposition are taking to the streets, demanding that President Rajapaksa go home. Many media houses are criticising the government, while social media pages are rife with memes and sharp commentary on the Rajapaksas.

What is the government’s response?

“This crisis was not created by me,” President Rajapaksa has said, pointing to challenges that arose due to the pandemic. Despite many economists putting forward support from the International Monetary Fund (IMF) as the “only option” for the government, the establishment was reluctant until recently when mounting protests and criticism forced the government into a policy U-turn. The government is now in talks with the IMF to “to find a way to pay off our annual loan instalments, sovereign bonds”, Mr. Rajapaksa said. It remains to be seen how the IMF will support Sri Lanka at this juncture, and to what extent its support might help the country cope with the crisis. Colombo has also sought support from various bilateral partners, including India, by way of loans, currency swaps, and credit lines for import of essentials.

How is India helping?

Beginning January 2022, India has extended assistance totalling $ 2.4 billion — including an $400 million RBI currency swap, a $500 million loan deferment, and credit lines for importing food, fuel, and medicines. Of this, a billion-dollar credit line was finalised last week, during Finance Minister Basil Rajapaksa’s visit to New Delhi. “Neighbourhood first. India stands with Sri Lanka. $1 billion credit line signed for supply of essential commodities. Key element of the package of support extended by India,” External Affairs Minister S. Jaishankar said in a tweet.

Meanwhile, China is considering Sri Lanka's recent request for further $2.5 billion assistance, in addition to the $2.8 billion Beijing has extended since the outbreak of the pandemic, the Chinese Ambassador in Colombo told a media conference.

How is India’s assistance being viewed in Sri Lanka?

The leadership has thanked India for the timely assistance, but there is growing scepticism in Sri Lankan media and some sections, over Indian assistance “being tied” to New Delhi inking key infrastructure projects in the island nation in the recent past — mainly the strategic Trincomalee Oil Tank Farm project; the National Thermal Power Corporation’s recent agreement with Ceylon Electricity Board to set up a solar power plant in Sampur, in Sri Lanka’s eastern Trincomalee district; and two renewable energy projects in northern Sri Lanka, with investment from India’s Adani Group.

The weekend newspaper Sunday Times took an editorial position that New Delhi was resorting to “diplomatic blackmail”, while cartoonists have depicted Sri Lankan leaders trading crucial energy projects for emergency financial assistance from India. The political opposition has accused the Adani Group of entering Sri Lanka through the “back door”, avoiding competitive bids and due process.

THE GIST
The economic meltdown started during the first wave of the pandemic in 2020 when key foreign exchange earning sectors, such as exports and remittances, along with tourism, were brutally hit.
The Sri Lankan rupee has fallen to nearly 265 against the U.S. dollar. Consumer Price inflation is at 16.8% and Sri Lanka has to repay foreign debt totalling nearly $7 billion this year and continue importing essentials from its dwindling dollar account.
Beginning January 2022, India has extended assistance totalling $2.4 billion to its neighbour. However, there is growing scepticism in Sri Lankan media over Indian assistance “being tied” to New Delhi inking key infrastructure projects in the island nation.


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Printable version | Mar 24, 2022 12:38:20 am | https://www.thehindu.com/news/international/sri-lankas-aggravating-economic-crisis/article65243705.ece