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Why Sri Lanka is on the brink of bankruptcy

11 Feb 2022

By Shweta Sengar Sri Lanka is facing a deepening financial and humanitarian crisis that could lead to bankruptcy in 2022 as inflation rises to a record level.  According to World Bank (WB) estimates, five lakhs of people in Sri Lanka have fallen below the poverty line since the pandemic struck, which is described as a “huge setback equivalent to five years’ worth of progress”. What caused the economic crisis in Sri Lanka?  The meltdown faced by the Government, led by the strongman President Gotabaya Rajapaksa, is in part caused by the immediate impact of the Covid crisis and the loss of tourism, but is compounded by high government spending and tax cuts eroding state revenues, vast debt repayments to China and foreign exchange reserves at their lowest levels in a decade.  Inflation has meanwhile been spurred by the Government printing money to pay off domestic loans and foreign bonds. The WB estimates 500,000 people have fallen below the poverty line since the beginning of the pandemic, the equivalent of five years’ progress in fighting poverty. Inflation hit a record high of 11.1% in November and escalating prices have left those who were previously well-off struggling to feed their families, while basic goods are now unaffordable for many. The loss of jobs and vital foreign revenue from tourism, which usually contributes to more than 10% of the gross domestic product (GDP), has been substantial, with more than 200,000 people losing their livelihoods in the travel and tourism sectors, according to the World Travel and Tourism Council. China’s role in the crisis One of the most pressing problems for Sri Lanka is its huge foreign debt burden, in particular to China. It owes China more than $ 5 billion in debt and last year took an additional $ 1 billion loan from Beijing to help with its acute financial crisis, which is being paid in instalments. In the next 12 months, in the government and private sector, Sri Lanka will be required to repay an estimated $ 7.3 billion in domestic and foreign loans, including a $ 500 million international sovereign bond (ISB) repayment in January. However, as of November 2021, available foreign currency reserves were just $ 1.6 billion, according to The Guardian. India extends help Sri Lanka has initiated a country strategy for India with an eye on integrating its “fragile” economy with the Indian economy with a focus on eight sectors to boost fortune. The Gotabaya Rajapaksa Government has identified eight sectors including energy, refineries, electricity grid, ports, real estate, tourism, and information and communication technology (ICT) for attracting India’s investments and footprints in the island nation, Economic Times (ET) had reported last month. In January, India confirmed a $ 400 million currency swap with Sri Lanka while deferring another $ 500 million due for settlement to the Asian Clearing Union (ACU), in a move aimed at helping the island nation witnessing an unprecedented economic crisis. In a Tweet, the Indian Mission in Colombo said High Commissioner Gopal Baglay met Central Bank of Sri Lanka (CBSL) Governor Ajith Nivard Cabraal and expressed “India’s strong support to Sri Lanka” in the wake of the Reserve Bank of India, extending facilities of $ 900 million over the last week. India’s assistance follows a request from Sri Lanka during Finance Minister Basil Rajapaksa’s visit to New Delhi in December, for emergency financial assistance, including lines of credit (LoCs) for importing essentials and a currency swap to boost Sri Lanka’s draining foreign reserves.  The developments have prompted political commentators in Sri Lanka to pit India and China against each other, in providing timely assistance to the island nation. In July 2020, the RBI extended a similar swap facility — of $ 400 million — to help Sri Lanka cope with the impact of the first wave of the pandemic, and later provided a three-month rollover until February 2021, when the CBSL settled it. This article was first published by India Times on 10 February.


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