By Devjyot Ghoshal
NEW DELHI (Reuters) – Anger at Sri Lankan President Gotabaya Rajapaksa’s handling of a deepening economic crisis in the island nation of 22 million sparked violence late Thursday as hundreds of protesters clashed with police for several hours.
A severe foreign exchange shortage has left the Rajapaksa government unable to pay for essential imports, including fuel, resulting in crippling power outages lasting up to 13 hours.
Ordinary Sri Lankans are also grappling with shortages and rising inflation after the country sharply devalued its currency last month ahead of talks with the International Monetary Fund (IMF) over a loan program.
HOW DID SRI LANKA GET HERE?
Critics say the roots of the crisis, the worst in several decades, lie in economic mismanagement by successive governments that have created and perpetuated a dual deficit – a budget deficit alongside a current account deficit.
“Sri Lanka is a classic twin deficit economy,” said a 2019 Asian Development Bank working paper. “Twin deficits signal that a country’s government spending exceeds its national income and that its production of tradable goods and services is insufficient.”
But the current crisis has been accelerated by deep tax cuts promised by Rajapaksa during a 2019 election campaign, enacted months before the COVID-19 pandemic wiped out parts of Sri Lanka’s economy.
As the country’s lucrative tourism industry and remittances from foreign workers have been eroded by the pandemic, credit rating agencies downgraded Sri Lanka, effectively shutting it out of international capital markets.
In turn, Sri Lanka’s debt management program, which depended on access to these markets, faltered, and foreign exchange reserves collapsed by almost 70% in two years.
The Rajapaksa government’s decision to ban all chemical fertilizers in 2021, a move that was later reversed, also hit the country’s agricultural sector and led to a drop in the critical rice crop.
The story goes on
WHAT H`PENS TO SRI LANKA’S FOREIGN DEBT?
As of February, the country had just $2.31 billion in reserves but faces around $4 billion in debt repayments in 2022, including a $1 billion international government bond (ISB) dollars due in July.
ISBs account for the bulk of Sri Lanka’s external debt at US$12.55 billion, with the Asian Development Bank, Japan and China among the other big lenders.
In a review of the country’s economy released last month, the IMF said the national debt had risen to “unsustainable levels” and foreign exchange reserves were insufficient for short-term debt payments.
In a note late last month, Citi Research said the conclusion of the IMF report and the government’s recent actions were insufficient to restore debt sustainability, strongly pointing to “the need for debt restructuring”.
WHO HELPS SRI LANKA?
For months, Rajapaksa’s government and the Central Bank of Sri Lanka (CBSL) have resisted calls from pundits and opposition leaders to turn to the IMF for help, despite rising risks.
But after oil prices skyrocketed in the wake of Russia’s invasion of Ukraine in late February, the government finally devised a plan to approach the IMF in April.
The IMF will begin talks with the Sri Lankan authorities over a possible loan program in the “coming days,” an IMF spokesman said Thursday.
Before going to the IMF, Sri Lanka severely devalued its currency, fueling inflation and adding to the pain of the public, many of whom are enduring hardships and long queues.
Meanwhile, Rajapaksa has also asked China and India for help, specifically for help in procuring fuel. A shipment of diesel under a $500 million credit line signed with India in February is expected to arrive on Saturday.
Sri Lanka and India have signed a US$1 billion credit line to import essential necessities, including food and medicines, and the Rajapaksa government has requested at least another US$1 billion from New Delhi.
After China provided the CBSL with a $1.5 billion swap and a $1.3 billion syndicated loan to the government, China is considering a $1.5 billion loan facility for the island nation $1 billion and a separate loan of up to $1 billion.
(Reporting by Devjyot Ghoshal; Editing by Mike Collett-White)
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