Finschool By 5paisa

FinSchoolBy5paisa

Sri Lanka is Bankrupt -The Worst Economic Crisis

Sri Lanka

Sri Lanka is bankrupt! These were the words of Sri Lankan Prime Minister Ranil Wickremesinghe as the country is suffering the huge financial crisis in decades, which has left millions of people struggling to buy food, medicine and fuel.

The Island which is the Wonder of Asia has faced so much during these few years that today it is example for each and every debt ridden country . Lets take a look at  Riches to Rags story of Sri Lanka.

Sri Lanka-The Wonder Of Asia
  • The tropical island is famous for its diverse landscape: from the blue coastal belt to green mountains within just hours of each other, and the island’s lush greenery ranging from coconut palm groves to paddy fields and tea plantations, embellished by over 200 natural waterfalls
  • Spices, sapphires and elephants have been synonymous for centuries with Sri Lanka, previously known as Ceylon. The unique location of the island in the Indian Ocean once served as a hub for trading aromatic cinnamon, cardamom, nutmeg and pepper were plentiful and the natural sparkle of gems with their multitude of hues, iconic to their colorful land, were amongst the natural exports. 
  • Sri Lanka vision was to establish as Asia’s most treasured island, highlighting its beautiful beaches, warm and friendly people, with a strong nature, culture and adventure offering, raising its profile to that of an Asian tourism icon.
So what went wrong for Sri Lanka?
  • A severe shortage of foreign currency left Sri Lankan Government unable to pay for essential imports, including fuel, leading to debilitating power cuts lasting up to 13 hours. Also Sri Lankans are dealing with the rising inflations.
  • The country steeply devalued its currency ahead of talks for loan programs with International Monetary Fund. The government blames the Covid 19 pandemic, which affected Sri Lanka’s tourist trade – one of its biggest foreign currency earners. It also says tourists have been frightened off by a series of deadly bomb attacks on churches in 2019.
  • Critics say the roots of the crisis, the worst in several decades, lie in economic mismanagement by successive governments that created and sustained a twin deficit – a budget shortfall alongside a current account deficit.
  • Twin deficits signal that a country’s national expenditure exceeds its national income, and that its production of tradable goods and services is inadequate.
  • With the country’s lucrative tourism industry and foreign workers’ remittances sapped by the pandemic, credit ratings agencies moved to downgrade Sri Lanka and effectively locked it out of international capital markets. The government has also racked up huge debts with countries including China, to fund what critics have called unnecessary infrastructure projects.
  • In turn, Sri Lanka’s debt management programme, which depended on accessing those markets, derailed and foreign exchange reserves plummeted by almost 70 per cent in two years.
  • The Rajapaksa government’s decision to ban all chemical fertilizer’s in 2021, a move that was later reversed, also hit the country’s farm sector and triggered a drop in the critical rice crop.
  • Apart from all these country has hugely spend on projects like Matala Rajapaksha International Airport, Hambantota Airport, Columbo Port City Projects, Where China is a common factor to all projects. China is known to lay debt traps but Sri Lanka failed miserably due to this.
Sri Lankan Foreign Debts
  • Sri Lanka foreign Debt is around $4 billion in 2022 whereas it has reserves of only $2.31 billion including a $1 billion international sovereign bond maturing in July.
  • ISBs make up the largest share of Sri Lanka’s foreign debt at $12.55 billion, with the Asian Development Bank, Japan and China among the other major lenders.
Current Situation at Sri Lanka
  • School closures extended for one week because there isn’t enough fuel for teachers and parents to get to the classrooms and the energy minister has appealed to the country’s expatriates to send money home through banks to finance new oil purchases
  • Authorities also announced countrywide power cuts of up to three hours a day, Sri Lanka has suspended repayment of about $7 billion in foreign loans due this year out of $25 billion to be repaid by 2026.
  • The economic meltdown has triggered a political crisis with widespread anti-government protests erupting across the country. Protesters have blocked main roads to demand gas and fuel, and television stations showed people in some areas fighting over limited stocks.
  • In the capital, Colombo, protesters have been occupying the entrance to the president’s office for more than two months to demand President Gotabaya Rajapaksa’s resignation.
Neighbours Helping Lankans to get out of Crisis
  • Sri Lanka is currently working on the debt restructuring sustainability being prepared by legal and financial experts. Sri Lanka will need $5 billion over the next six months to ensure basic living standards, and is renegotiating the terms of a yuan-denominated swap worth $1.5 billion with China so as to fund essential imports
  • The Indian Ocean nation of 22 million is negotiating a loan package worth about $3 billion from the International Monetary Fund, in addition to help from countries such as China, India and Japan.
  • The cabinet approved a $55-million credit line from India’s Exim Bank to fund 150,000 tonnes of urea imports – a critical requirement as supplies have run out during the current cropping season.
  • The IMF has said the government must raise interest rates and taxes as a condition of any loan. The World Bank has agreed to lend Sri Lanka $600m. India has committed $1.9bn and may lend an additional $1.5bn for imports.
  • The G7 group of leading industrial countries – Canada, France, Germany, Italy, Japan, UK and the have said they will provide help to Sri Lanka in securing debt relief. Sri Lanka owes $6.5bn to China and the two are in talks on how to restructure the debt.
  • Sri Lanka desperately needs the help of Russian President Vladimir Putin for both fuel and tourists, which are both vital to rescuing the country’s economy.
  • The island nation has virtually run out of fuel, crippling businesses and public transport. It is struggling to get oil shipments from its usual suppliers in the Gulf or elsewhere due to a lack of foreign currency as well as banking and logistical difficulties.
  • Western nations have imposed restrictions on Russian oil in response to its invasion of Ukraine. But President Gotabaya Rajapaksa is clearly willing to take the risk of triggering displeasure in Western capitals.
India Helps Sri Lanka
  • India handed a total of 3.3 tons of essential medical supplies to Sri Lanka.
  • These humanitarian supplies are in continuation of the Indian government’s ongoing support to the people of the crisis-ridden island nation in forms such as financial assistance, forex support, material supply.
  • In line with Prime Minister Narendra Modi’s ‘Neighbourhood First’ policy, more than 25 tons of drugs and medical supplies which were donated by the Government and people of India during the last two months are valued at close to SLR 370 million.
  • This is in addition to the economic assistance of around USD 3.5 billion and supply of other humanitarian supplies such as rice, milk powder, kerosene etc.
Conclusion

Sri Lanka Crisis is a warning for all the debt ridden countries. A country is run by its Economy. Economy is money. Sri Lankan crisis is because of national expenditure exceeding its national income and imports greater than exports.

Wisely discussed and formulated economic policies which doesn’t lay burden on the common man is the need of the hour.

Structured finances must be priority rather than Populist Policies in greed of votes and power . Because such policies eventually fail because at the end everything in the economy comes with the cost.

View All