Burdening Crises in Sri Lanka

Photo source: Financial Times

By Naveed Qazi | Editor, Globe Upfront

Sri Lanka hasn’t seen an economic catastrophe like seen in March 2022 in seventy years. Food inflation alone rose to a record thirty percent. Essentials, such as rice, lentils and chicken, have become unaffordable for many. 

As cost of living in the tourism driven country has become unbearable, Sri Lankans have taken out to the streets. As a response, government had gagged the social media and messaging apps. The protests have settled a great unease within Rajapaksa family, whose members hold key positions in the government.

Due to a public anger, the cabinet of ministers had resigned, and a new finance minister was announced. After a few days, he too resigned. It seems that most of Sri Lankans aren’t content with Rajapaksa’s rule. Former government officials have alleged that the Rajapaksa family has hidden their multibillion-dollar fortune in bank accounts in Dubai, the Seychelles, and St. Martin. For example, according to the Pandora Papers, Nirupama Rajapaksa (a member of the family and former parliamentarian) and her husband Thirukumar Nadesan, had amassed offshore holdings of $18 million, including priceless artwork and property. At least eight members of the Rajapaksa family and their supporters have been charged with crimes, including embezzlement and corruption, and are being investigated by authorities.

Sri Lanka had already been grappling with Asia’s highest rate of inflation, because of Covid19 lockdowns. The inflation had never crossed a ten-digit figure since 2008. A currency squeeze also saw fuel shortages, with people queuing for kilometers outside petrol stations, and there have been power cuts as long as seven hours. However, as per inputs by The Print, upper middle class and the rich in Colombo have largely remained unaffected by the ongoing economic crises, except for power cuts. Bars, events, nightclubs, and live performances have remained functional, despite the ongoing economic turmoil.

Economically, the island nation suffers from a mounting foreign debt. Cash strapped, it had taken short-term loans from India, Bangladesh and China. It was in June 2021 when Bangladesh loaned Sri Lanka $200 million. Then, in January 2022, Sri Lanka appealed to China to reschedule its debt. In February 2022, it borrowed $500m from India to buy oil. In March 2022, India paid Sri Lanka $1 billion line of credit to pay for essentials such as food and medicine. The crises has given a reason for the newly appointed central bank governor, Nandalal Weerasinghe to believe that the current economic crises would be resolved if central bank acts independently, without any political interferences. He has wanted changes in the interest rates, and expects a positive reaction from the local economic market in the coming time.

As of February 2022, Sri Lanka had only $2.1 billion in its foreign reserve, according to its central bank. As per an al-Jazeera article written by Alia Chugtai, Rehana Thowfeek, and Mariam Ali: ‘with debt payments of about $7bn due in 2022, including $1bn in international sovereign bonds (ISB) maturing in July 2022, Sri Lanka may find itself with no usable reserves.’ The International Monetary Fund (IMF) also said that public debt has hit ‘unsustainable levels’, and foreign exchange reserves are insufficient for near-term debt payments. The IMF may initiate discussions regarding a loan programme, if possible.

Another factor concerns Foreign Direct Investment (FDI). According to government data, the FDI into Sri Lanka has decreased to $548 million in 2020, compared to $793 million in 2019 and $1.6 billion in 2018. If the FDI into a country plummets, so does the foreign currency in its reserves.

The crisis has also pushed the country’s free healthcare system to the brink. Doctors work in flashlights in hospitals due to prolonged breakouts. Other equipment such as catheter, anesthetics, and gloves are also running low. As eighty five percent of its pharmaceuticals are imported, it has created more woes. The blackouts have immensely affected small and medium business enterprises as well. Some people in Colombo are even selling their gold ornaments for survival.