Colombo, April 03: While problems have been brewing for years, spillovers from the crisis in Ukraine have sent the island nation over the edge. As an unprecedented economic crisis is unfolding in Sri Lanka. And while the country’s problems have been brewing for years, spillovers from the crisis in Ukraine have sent the island nation over the edge. (Vidhura S Tennekoon an Assistant Professor of Economics at IUPUI diagnoses the slide of Sri Lanka economy from boom to bust over the years).
The Sri Lankan rupee has plunged to a record low against the US dollar. Annual inflation is in the double digits. Import controls are in effect. And the country is teetering on the edge of default Sri Lanka is now turning to foreign assistance for help, including its two biggest trading partners. China is considering offering $ 2.5 billion more over the $ 2.8 billion already extended and India has put up $ 2.4 billion. And President Gotabaya Rajapaksa’s government is currently in negotiations with the International Monetary Fund and the World Bank for a bigger aid package – something he had previously resisted, to avoid the often-onerous terms they require. Sri Lanka, which gained its independence from Britain in 1948, only recently emerged from a deadly and costly 26-year civil war.
The export controls caused shortages of essential goods like cooking gas and milk, and defending the currency drained Sri Lanka’s foreign reserves. Moreover, remittances began to drop as the black-market value of the rupee fell, leading people to avoid converting US dollars to Sri Lankan rupees at the official rate or by official channels. Annual inflation has been estimated at as much as 55%, compared with the official rate of 14%.
By March, reverberations from the war in Ukraine, which drove up international prices of oil, wheat and many other commodities, finally forced the government to change course. Beyond the effect on the cost of imported goods, the war also further threatens Sri Lanka’s tourism industry as flights to Moscow are now suspended. Before the war, Russians frequently made up the biggest share of Sri Lankan tourists, with Ukrainians not far behind.
Sri Lankan authorities had few other options than to allow the rupee to depreciate – which is expected to save billions of dollars a year – and seek International Monetary Fund assistance. Sri Lanka will likely also have to restructure its large debt load – by asking foreign bondholders to accept less than 100% of the value of their investments – to make it more sustainable.
Over 350 “non-essential” items are now banned for import, including milk, oranges and household appliances.
And the limited supply of goods that remain is getting more expensive every day. The price of cooking gas, for example, is almost three times higher than it was just five months ago.
Securing loans from the International Monetary Fund and the World Bank, along with short-term credit from China and India, may stabilize Sri Lanka’s economic and financial situation. But with protests growing and the austerity measures demanded by the lenders likely to prove unpopular, the government may find it hard to survive for long.
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