Economic crisis in Sri Lanka: Why Sri Lanka is facing its worst economic crisis in decades | International Business News

NEW DELHI: The Sri Lankan economy has faced one of the worst economic crises in its history, resulting from poor management of public finances and untimely tax cuts, in addition to the impact of the Covid pandemic -19.
Huge piles of foreign debt, a series of lockdowns, runaway inflation, shortage of fuel supply, falling foreign exchange reserves and currency devaluation have had a negative impact on the country’s economic growth.
Sri Lanka’s economy grew at a slower-than-expected pace of 1.8% in the fourth quarter of fiscal 2021, lifting its full-year growth to 3.7%, data showed. government statistics department.
The Sri Lankan central bank had forecast growth of 5% for the year.
Countries like India, China and Bangladesh have stepped in to help Sri Lanka through this crisis. He also requested financial assistance from the International Monetary Fund (IMF).

What led to this crisis
Sri Lanka’s economy was struggling even before the Covid pandemic hit. The closures have further compounded its woes and have hit the informal sector hard, which accounts for nearly 60% of the country’s workforce.
The country’s foreign exchange reserves have fallen 70% in the past two years to about $2.31 billion, leaving it struggling to pay for essential imports including food and fuel.

The financial crisis also resulted from a critical foreign exchange deficit, preventing traders from financing imports.
Tourism, one of the country’s main sources of foreign exchange, has been hit hard due to the Covid pandemic. In addition, remittances from Sri Lankans working abroad have also declined sharply.

The country finds itself with foreign exchange reserves of around $2.31 billion just in February, even as it faces debt payments of around $4 billion for the rest of the year.
“The reason for the shortage is not a shortage of commodities but a shortage of dollars,” Dhananath Fernando, chief operating officer of the Colombo Advocate Institute think tank, told Reuters news agency.
The $4 billion debt includes a $1 billion international sovereign bond that matures in July.


Job losses, shortages disrupt lives
Job losses have become a common occurrence in almost every household. In addition, declining incomes have led to rising poverty rates.
According to World Bank data, the share of poor people based on a daily income of $3.20 is estimated to have risen to 11.7% in 2020 – or by more than half a million people – against 9.2% the previous year.

The government had identified 5 million families with “the fragile financial situation of low-income households” and granted them an allowance of Rs 5,000 during the Covid-19 lockdowns.
But that only helped briefly, with the latest economic crash – aggravated by the Russia-Ukraine conflict that has driven oil prices soaring – serving another punch and making scenes of desperation increasingly common. and panic.
Shortages have reached such levels that exams for millions of students across the country have had to be postponed due to lack of paper and ink.
10 hour power cuts
The fuel shortage was already causing long hours of power outages across the country. However, on Wednesday, the daily blackouts were further extended to 10 a.m.
Since the start of this month, people were reporting 7-hour outages across the country.

The unavailability of fuel to generate hydroelectricity resulted in a shortage of 750 megawatts of thermal energy.
More than 40% of Sri Lanka’s electricity is generated by hydropower, but most reservoirs were dangerously low because there had been no rain, officials told AFP news agency.

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Children attend online classes using a kerosene lamp during a power outage in Colombo. (Photo: AP)
Coal and oil are the main components used by the country for electricity generation. Both are imported but in insufficient quantity because the country does not have enough foreign currency.
The main fuel retailer, state-owned Ceylon Petroleum Corporation (CPC), said there would be no diesel in the country for at least 2 days.
The CPC told motorists waiting in long queues at gas stations not to leave and return until after the imported diesel has been unloaded and dispensed.
Fight for fuel
The crisis is so much worse that people have to fight for something as basic as fuel.
Sri Lanka ordered troops to petrol stations last week as sporadic protests erupted among thousands of people who had lined up for fuel.

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Fuel shortages have led to long queues at gas stations and power cuts across much of the country.
A severe shortage of diesel has shut down several thermal power plants, causing power outages across the country.
Fuel prices have also risen frequently, with gasoline up 92% and diesel 76% year-to-date.
The government took 12 days to find $44 million to pay for the last shipment of LPG and kerosene, officials told AFP.
Rampant inflation
In March 2020, Colombo had imposed a broad import ban to save foreign currency needed to service its $51 billion in foreign debt. But it has led to widespread shortages of essential goods and steep price hikes.
Many people in the country are opting for cheaper groceries, in order to reduce their expenses. They also reduce entertainment bills to zero.
Even a cup of tea now costs 100 rupees, down from 25 rupees in October last year, according to a report from the country’s local media website.

During a visit to the doctor, medication has also become increasingly expensive, with most people resorting to self-medication, a practice which the World Health Organization (WHO) says can lead to higher morbidity.
Many hospitals halted routine surgeries and supermarkets were forced to ration basic foods, including rice, sugar and powdered milk.
Earlier this month, the country’s central bank raised interest rates to contain rising inflationary pressures and urged the government to consider measures such as cutting non-essential imports and raising fuel prices. to reduce pressure on the struggling economy.
Retail price inflation in February reached 15.1%, while food inflation reached 25.7%, the highest in a decade. The Central Bank of Sri Lanka (CBSL) aims to keep inflation in the 4-6% range over the medium term.

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Protesters outside the Central Bank of Sri Lanka (Photo: AFP)
“Nothing to eat, drink”
The sudden rise in prices of major commodities has left many people at the mercy of subsidies as all essential items are in short supply due to import restrictions imposed by the currency crisis.
Anger appears to be rising among people as they fight over daily necessities and worry about how to feed their families amid soaring food prices.
A housewife in Colombo told AFP that people line up in long queues every day, even before dawn, just to get their share of kerosene which can be used to light their stoves. She also said that few people fainted and that she herself feels sick from not having eaten anything.
Another woman, a domestic worker, remembers being in the country for 60 years and never witnessing such a situation. She also complained of not having anything to eat or drink, as told by AFP.
currency devaluation
Sri Lanka’s central bank devalued the rupee by up to 15%.
the Central Bank of Sri Lanka, with immediate effect, set an exchange rate limit of 230 rupees per dollar against a limit of 200-203 that had prevailed since October.
In December, CBSL announced a series of measures, including providing an additional 10 rupees per dollar as an incentive, but this had limited impact as remittances fell by 61.6% in January to 259 million, up from $675 million a year earlier.
How India Helps
In January, the Reserve Bank of India (RBI) announced a $400 million exchange to help Sri Lanka build up its reserves, as part of a neighbor-brokered aid package.
He then signed an agreement for a $500 million line of credit to buy fuel from India in February.
The deal proved key as global oil prices soared after Russia invaded Ukraine and Sri Lanka’s fuel import costs jumped 40% in a week . Indian Oil Corporation (IOC) shipments began arriving around mid-March.
In the same month, Sri Lanka and India signed a billion dollar line of credit for the import of essential goods, including food and medicine.
The country has now requested an additional line of credit of at least $1 billion from India to help deliver essential goods as shortages persist and protests erupt.
(With agency contributions)

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