COLOMBO, July 5 (Reuters) – A year after angry Sri Lankans stormed the president’s residence and forced his fall amid an economic crisis, the island’s streets are quiet, there are no lines at gas stations and power outages have raged for hours completed.
The central bank expects the economy to grow again this quarter after six quarters of contraction — faster than many economists expected — while outbound remittances surge and tourist numbers rise.
While economists assume the country is through the worst of the crisis, the problems are far from over. The cost of food, healthcare and house rents are high and rising, the poverty rate has doubled in the last year and is expected to rise further, while negotiations to restructure the government’s crippling debt burden face some uncertainty.
“There is some stability, but that means there are no extreme shortages, no fuel queues and no 13-hour power outages,” said Rehana Thowfeek, an economist at the think tank Advocata Institute in Colombo.
“Inflation is falling, but compared to pre-crisis levels, the cost of living is very high and incomes have not been able to keep up. Most of the poor in Sri Lanka are day laborers and are among the hardest hit.”
Sri Lanka plunged into a financial crisis after the COVID-19 pandemic decimated tourism and remittances from citizens working abroad fell. The war in Ukraine significantly increased the prices of imports, especially fuel.
In March last year, thousands took to the streets to vent their anger at prolonged power outages and soaring prices, and to demand the resignation from power of the Rajapaksa family, which had dominated the country’s politics for the past 20 years.
After weeks of protests and a steadily worsening crisis, President Gotabaya Rajapaksa fled abroad and officially resigned on July 13. He was replaced as president by his prime minister, Ranil Wickremesinghe, who introduced reforms and negotiated a $2.9 billion bailout, according to the International Monetary Fund (IMF) in March.
Although price increases are slowing down, they are still high. Electricity costs, which rose 65% in February, remain difficult for low-income families, despite falling 14.2% in July.
The main inflation index was 12% in June and is expected to reach single digits in July after peaking at 70% in September and rebasing in February. However, the cost of food, clothing, health care and housing remains high.
Food inflation hit a record high of 95% in September and although it has fallen, June’s reading of 4.1% means prices are still rising. Clothing prices rose 44% year-on-year in June, home prices rose 26% and medicine prices rose 16%.
Rising costs are having a negative impact on poverty, which nearly doubled to 25% of the population last year, according to the World Bank, and could rise to 27.4% this year. Last week, the multilateral lender to developing countries approved a $700 million loan for Sri Lanka, including $200 million for the poor.
A LOT TO DO
As part of a new initiative to help the poor, the government announced it will launch a direct cash transfer program to some 2.3 million families later this month and has pledged to spend $680 million a year on their welfare. But critics say the monthly allowance of Rs. 2,500 (US$8) to Rs. 15,000, depending on the level of poverty, is insufficient.
Kamal Padmasiri, a board member of the state’s Welfare Benefits Board, estimated the need at Rs. 13,800 per person per month but said the treasury could not pay the full amount.
“We are in a default situation in Sri Lanka,” Padmasiri told Reuters. “Money transfers are granted for three years and people have to evolve and evolve during that time. The payments are not permanent… we cannot afford it.”
However, there were some gains.
A 30% rise in tourism receipts this year and a 76% surge in remittances have injected US$3.2 billion into Sri Lanka’s treasury and helped propel reserves to a 14-month high of 3. reached $5 billion and the currency has appreciated about 18% this year.
Sri Lanka still has to pay off a large part of its US$36 billion in external debt, including US$12.5 billion in international government bonds and US$11.3 billion in bilateral loans, mainly owed to China, Japan and India are.
Wickremesinghe has set a goal of completing debt talks by September, which if successful would allow a second tranche of IMF financing to be released by October.
But China, Sri Lanka’s largest bilateral lender with around $7.4 billion in outstanding bilateral and commercial loans, has so far declined to join a so-called joint framework led by Japan and the Paris Club to renegotiate Sri Lanka’s debt. Continue reading
Also, despite the growth forecast, Sri Lanka’s export-led economy is expected to contract by 2% for the full year from the July quarter after contracting by 7.8% in 2022. Exports fell 11% this year through May, mainly due to a 16.5% drop in apparel sales to the European Union and the United States.
“We really need an acceleration of our exports, we need real investors and we need to push market access through free trade agreements and other measures,” said Shiran Fernando, chief economist at Sri Lanka’s largest industry body, the Ceylon Chamber of Commerce.
“The IMF program will only keep us going for the next year or two, but beyond that we need stronger reforms around land, labor and loss-making SOEs.”
($1 = 307.5000 Sri Lankan rupees)
Reporting by Uditha Jayasinghe; Editing by Krishna N. Das
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