Sri Lanka faces a deepening financial and humanitarian crisis and fears it could go bankrupt in 2022 as inflation soars to record levels, food prices skyrocket and coffers empty.
The government collapse, led by the powerful President Gotabaya Rajapaksa, is caused in part by the immediate effects of the Covid crisis and the loss of tourism, but is being driven by high government spending and tax cuts that are eroding government revenues, as well as huge debt repayments to China and foreign exchange reserves at its lowest level in a decade. Meanwhile, inflation has been fueled by the government printing money to pay off domestic loans and foreign bonds.
The World Bank estimates that 500,000 people have fallen below the poverty line since the pandemic began, the equivalent of five years of progress in reducing poverty.
Inflation hit a record high of 11.1% in November, and soaring prices have meant that those previously well-off have struggled to support their families, while staples are unaffordable for many today. After Rajapaksa declared Sri Lanka’s economic distress, the military was given the power to ensure that essentials like rice and sugar are sold at government set prices – but it has done little to alleviate the plight of the people.
Anurudda Paranagama, a chauffeur in the capital, Colombo, took a second job to pay for rising food costs and cover the loan for his car, but it wasn’t enough. “I find it very difficult to repay the loan. If I have to pay electricity and water bills and spend on groceries, there is no more money, ”he said, adding that his family now eats two meals a day instead of three.
He described how his grocer in the village opened 1 kg packets of powdered milk and divided it into 100 g packs because his customers could not afford the whole pack. “We buy 100 g of beans now, whereas we used to buy 1 kg for the week,” said Paranagama.
The loss of jobs and vital foreign tourism revenue, which typically accounts for more than 10% of GDP, has been substantial as more than 200,000 people lost their livelihoods in the travel and tourism industries, according to the World Travel and Tourism Council.
The situation is so dire that long queues form in front of the passport authority, because every fourth Sri Lankan, mostly young and educated, wants to leave the country. For older citizens, it is reminiscent of the early 1970s, when import controls and low domestic production led to a serious shortage of staple foods and long lines for bread, milk and rice.
Former Central Bank Deputy Governor WA Wijewardena warned that ordinary people’s struggles would exacerbate the financial crisis, which in turn would make life difficult for them. “If the economic crisis worsens to the point of redemption, it is inevitable that the country will also have a financial crisis,” he said. “Both will reduce food security by lowering production and not importing due to foreign exchange shortages. At that point it will be a humanitarian crisis. “
One of the most pressing problems facing Sri Lanka is its enormous external debt burden, particularly with China. It owes China more than $ 5 billion in debt and took an additional $ 1 billion loan from Beijing last year.
Over the next 12 months, Sri Lanka will have to repay an estimated $ 7.3 billion in domestic and foreign loans to the public and private sectors, including a $ 500 million in January. USD.
In the usual fashion, Government Minister Ramesh Pathirana said they hoped to pay off their previous oil debts with Iran by paying them with tea and sending them $ 5 million worth of tea every month to save “much-needed currency”.
Opposition MP and economist Harsha de Silva recently told Parliament that foreign exchange reserves would be $ 437 million by January next year, while total external debt would be $ 4.8 billion from February to October 2022. “The nation will be completely bankrupt,” he said.
Central bank governor Ajith Nivard Cabraal publicly assured that Sri Lanka could “seamlessly” pay its debts, but Wijewardena said the country was at significant risk of repaying its repayments, which would have catastrophic economic consequences.
Meanwhile, Rajapaksa’s sudden decision in May to ban all fertilizers and pesticides and forcing farmers to switch to organic without warning has brought a once prosperous agricultural community to its knees, like many farmers who had become accustomed to using fertilizers and pesticides use – and often use too much. Suddenly there were no more options available to produce healthy plants or to control weeds and insects. Many, fearful of loss, decided not to grow crops at all, adding to the food shortage in Sri Lanka.
The government made a dramatic U-turn at the end of October and farmers are now struggling to cover the high costs of imported fertilizer without help.
“The cost of growing rice [wheat] have increased astronomically … The government has no money for fertilizer subsidies. Many of us farmers are reluctant to invest money because we don’t know if we will make a profit, ”said one farmer, Ranjit Hulugalle.
To temporarily alleviate the problems and stave off difficult and highly likely unpopular measures, the government has put in place temporary relief measures, such as lines of credit to import food, medicine and fuel from its neighboring ally India, and currency swaps from India, China and Bangladesh, and loans to buy from Oil from Oman. However, these loans only offer short-term relief and must be repaid quickly at high interest rates, which further increases Sri Lanka’s debt burden.
Anushka Shanuka, a personal trainer, was among those who used to lead a comfortable life but are now struggling to get by. “We can’t live the way we did before the pandemic,” he said, saying vegetable prices had risen by more than 50%.
“The government promised to help us, but nothing came, so we only manage the best we can. I don’t know how long we can go on like this. “