Financial crisis: Sri Lanka on the brink of an Economic Collapse

Suhail Guptil, writing in the Colombo Gazette, stated that, Sri Lanka's foreign debt has been increasing since 2014, reaching 42.6% of GDP in 2019.

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Financial crisis: Sri Lanka on the brink of an Economic Collapse

Sri Lankan economy is on the verge of facing bankruptcy in 2022, after continuously facing twin deficits, that is, the Fiscal deficit and Trade deficit.  The Economy has been teetering since August 30 last year when the Sri Lankan government announced a National Financial Emergency, following a sharp drop in the value of the country’s currency.

Suhail Guptil, writing in the Colombo Gazette, stated that, Sri Lanka’s foreign debt has been increasing since 2014, reaching 42.6% of GDP in 2019. According to Guptil, the country’s total foreign debt was anticipated to be USD 33 billion in 2019, putting a severe load on the country’s debt servicing.

Also Read: Sri Lanka seeks $1.5 billion Indian credit line amid crisis

Retrospectively, various credit rating agencies such as Standard & Poor’s, Moody’s, and Fitch downgraded Sri Lanka’s credit rating to B from C, which makes it difficult to obtain funds through International Sovereign Bonds (ISBs), Guptil said.

The country needs to repay an estimated $7.3 billion in domestic and foreign loans in the next 12 months, says a report by the British newspaper Guardian. This includes g a $500-million international sovereign bond repayment due in January. As of November, the available foreign currency reserves were just $1.6 billion, it said.

Various factors like high government spending and tax cuts eroding state revenues, vast debt repayments to China, and record low foreign exchange reserves have been compounded by the COVID-19 pandemic and consequent loss of tourism which has led to this ultimate meltdown.

As per the World Bank, around 500,000 people have fallen below the poverty line since the beginning of the pandemic, the equivalent of five years’ progress in fighting poverty.

As a part of relief measures, taken to calm public anger, President Gotabaya Rajapaksa’s government has announced a $1BN relief plan.  As a part of the plan, the government will increase pay and pensions for government employees, roll back some taxes on food and medicine and boost income support for the poorest citizens. However, Sri Lanka’s main opposition slammed the relief package, saying it doesn’t address the issue of external liquidity and domestic inflation, which accelerated to 12.1% in December, the second-fastest pace in Asia after Pakistan.

In order to cut down expenditure in the face of the ongoing financial crisis and dollar crunch, Colombo has decided to close three overseas diplomatic missions from December 2021. However, these measures will provide only short-term relief and the loans will have to be paid back at high-interest rates, adding to Sri Lanka’s debt load, Guptil added.

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Financial crisis: Sri Lanka on the brink of an Economic Collapse
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Suhail Guptil, writing in the Colombo Gazette, stated that, Sri Lanka's foreign debt has been increasing since 2014, reaching 42.6% of GDP in 2019.
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THE POLICY TIMES
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