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Sri Lanka’s looming economic crisis

Date: 08 January 2022 Tags: India & World

Issue

Sri Lanka’s external foreign reserves have fallen to all-time low of $1.6 billion, creating alarm in different quarters.

 

Background

Many of Sri Lanka’s sovereign bonds are due to mature this year. The country has to pay around $1.5 billion in next six months.

 

Details

  • The sovereign credit rating of the country has been degraded to ‘CC’ category by American credit rating agency Fitch, which is the lowest.

  • Despite economic crisis from the past few years, the island-nation has not defaulted. The falling currency and possible food shortage can change the situation this year.

 

Response of government

  • Sri Lanka’s foreign reserves have stood at $3.1 billion last year including $1.5 billion currency swap agreement with China.

  • The central bank of the country has earmarked $500 million for paying the sovereign bond that will mature this January.

  • The government blames the pandemic for the current crisis and has announced a special $1.2 billion package for “economic relief”.

 

Crisis and pandemic

  • Major foreign exchange earning sectors such as Tea, garments, tourism and spices were severely impacted. The foreign remittances were also seriously depleted.

  • Experts say that the crisis was not entirely the fault of pandemic as the problems had begun earlier. The pandemic has just exacerbated the older crisis.

 

Sri Lanka’s debt obligations

  • Majority of Sri Lanka’s external debt is dominated by market borrowings. International sovereign bonds amount to nearly half of the country’s total foreign debt.

  • In June this year, Sri Lanka has another $1 billion of bond payment. This will leave no foreign reserves to buy essentials such as food, fuel or medical supplies.

 

Future aspects

  • The food crisis may explode if production of paddy and other essentials reduce by half due to the move of the government to ban fertilizers.

  • Many experts suggest that the government negotiate with the International Monetary Fund (IMF) to restructure its external debt and find temporary finances.

 

Concerns in IMF deal

  • The IMF deal will demand that greater transparency is maintained in the way money is spent, which the ruling party is fearful of.

  • The IMF programme also asks to cut spending on social services and welfare programmes, which can aggravate the poverty conditions.

 

India’s role

India is said to be planning to extend an emergency line of credit to Sri Lanka for importing food and fuel.  There are demands for debt freeze and a currency swap.