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Current Affairs

Economic crisis in Sri Lanka

Date: 29 March 2022 Tags: Miscellaneous

Issue

Sri Lanka is witnessing a worst economic crisis as the nation is crumbling under its foreign debts owing to shortage of reserves.

 

Background

Sri Lanka’s economy is on a downward slide ever since the Easter bombings. The Covid-19 pandemic has aggravated the situation.

 

Details

  • The shortage of foreign currency has resulted in banks unable to secure dollars to finance imports of food, fuel and medicines.

  • The pandemic hit hard foreign revenue earning sectors such as tea, tourism and foreign remittance.

  • To save dollars, the government imposed a ban on imports. This caused shortages, resulting in soaring inflation.

  • The rates have climbed to more than 17 percent. The country is witnessing blackouts as electricity generators have been unable to function due to fuel shortages.

  • The debt ratings of the country have been degraded. Foreign rating agencies have expressed fears it may not be able to service its $51 billion sovereign debt.

Debt in Sri Lanka

  • This year, Sri Lanka has to pay $4billion worth of debt. By June it has to pay $1 billion, which looks unlikely as its sovereign reserves stood at $2.31 billion.

  • Sri Lanka has $11.8 billion worth of debt through sovereign bonds (ISB). In addition, it has to pay debts to Asian Development Bank (ADB).

 

Chinese debts

  • China has lent funds worth $5 billion for the construction of highways, ports, an airport and a coal power plant.
    Majority of these projects are costly and have low returns. There are demands to restructure the debts.
    Sri Lanka imports more goods from China than any other nations. It has obligation of around $400-$500 million.

 

Way ahead

  • Economists have suggested that the country put a temporary hold on debt payments by making restructuring deal.

  • The precious dollars could be used to pay for essentials such as fuel, food, medicines, milk, gas etc.