COLOMBO, Sri Lanka (AP) — Sri Lanka’s prime minister said late last month that the island nation’s debt-ridden economy had “collapsed” as it ran out of money to pay for food and fuel. Lacking the cash to pay for imports of such essential goods and already in default, it is seeking help from neighboring India and China and the International Monetary Fund.
Prime Minister Ranil Wickremesinghe, who took office in May, has emphasized the monumental task he faces to turn around an economy he says is headed for “rock bottom.” On Saturday, he and President Gotabaya Rajapaksa agreed to resign amid mounting pressure from protesters who stormed both of their residences and set fire to one of them.
Sri Lankans are skipping meals as they suffer shortages and queuing for hours to try to buy scarce fuel. This is a harsh reality for a country whose economy was growing rapidly, with a growing and comfortable middle class, until the latest crisis deepened.
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HOW SERIOUS IS THIS CRISIS?
The government owes $51 billion and is unable to pay interest on its loans, let alone reduce the amount it borrows. Tourism, an important driver of economic growth, has sputtered due to the pandemic and safety concerns following terrorist attacks in 2019. And its currency has collapsed by 80%, making imports more expensive and worsening already-out-of-control food inflation spending rose 57%, according to official figures.
The result is a country headed for bankruptcy with almost no money to import gasoline, milk, cooking gas and toilet paper.
Political corruption is also a problem; not only played a role in squandering the country’s wealth, but also complicated any financial bailout of Sri Lanka.
Anit Mukherjee, a policy fellow and economist at the Center for Global Development in Washington, said any aid from the IMF or the World Bank should come with strict conditions to ensure the aid is not mismanaged.
Still, Mukherjee noted that Sri Lanka is located in one of the busiest sea lanes in the world, so letting a country of such strategic importance collapse is not an option.
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HOW DOES IT AFFECT REAL PEOPLE?
In tropical Sri Lanka there is usually no shortage of food, but people are starving. The U.N.’s World Food Program says nearly nine in 10 families are skipping meals or otherwise skimping on food, while 3 million are receiving emergency humanitarian aid.
Doctors have turned to social media to try to get critical supplies of equipment and medicine. An increasing number of Sri Lankans are seeking passports to go abroad in search of work. Civil servants were given an extra day off for three months to have time to grow their own food.
In short, people are suffering and desperate for things to improve.
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WHY IS THE ECONOMY IN SUCH A BAD SHAPE?
Economists say the crisis stems from domestic factors such as years of mismanagement and corruption.
Much of the public’s anger has been directed at President Rajapaksa and his brother, former Prime Minister Mahinda Rajapaksa. The latter resigned in May after weeks of anti-government protests that eventually turned violent.
Conditions have worsened over the past few years. In 2019, Easter suicide bombings in churches and hotels killed more than 260 people. This devastated tourism, a key source of foreign exchange.
The government needed to boost revenue as foreign debt for major infrastructure projects soared, but instead Rajapaksa pushed through the biggest tax cuts in Sri Lanka’s history. The tax cuts were recently reversed, but only after creditors downgraded Sri Lanka, blocking it from borrowing more money as its foreign reserves sank. Tourism then declined again during the pandemic.
In April 2021, Rajapaksa suddenly banned the import of chemical fertilizers. The push for organic farming caught farmers by surprise and destroyed staple rice crops, driving up prices. To save foreign exchange, the importation of other items considered luxuries was also prohibited. Meanwhile, the war in Ukraine has driven up food and oil prices. Inflation was nearly 40% and food prices rose nearly 60% in May.
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WHY DID THE PRIME MINISTER SAY THE ECONOMY WAS COLLAPSING?
A stark declaration in June by Wickremesinghe, who is in his sixth term as prime minister, threatened to undermine any confidence in the state of the economy and did not reflect any concrete new developments. The prime minister appeared to highlight the challenges facing his government as it seeks IMF aid and faces criticism for a lack of improvement since he took office weeks earlier. The comment may have been intended to try to buy more time and support as he tries to get the economy back on track.
The Ministry of Finance said Sri Lanka only had $25 million in usable foreign reserves. This left it with no means to pay for imports, let alone repay billions in debt.
Meanwhile, the Sri Lankan rupee weakened to around 360 to the US dollar. This makes import costs even more exorbitant. Sri Lanka has suspended payment of about $7 billion in external loans due this year out of $25 billion due by 2026.
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WHAT IS THE GOVERNMENT DOING ABOUT THE CRISIS?
So far, Sri Lanka is crawling along, mainly supported by $4 billion credit lines from India. An Indian delegation came to the capital Colombo in June for talks on more aid, but Wickremesinghe warned against expecting India to keep Sri Lanka afloat for long.
“Sri Lanka puts last hope to IMF,” read a June headline in the Colombo Times. The government is negotiating with the IMF on a bailout plan, and Wickremesinghe said he expects to have a tentative agreement later this summer.
Sri Lanka also sought more help from China. Other governments such as the US, Japan and Australia have provided several hundred million dollars in support.
Earlier in June, the UN issued a global public appeal for help. So far, the planned funding barely scratches the surface of the $6 billion the country needs to stay afloat over the next six months.
To counter Sri Lanka’s fuel shortages, Wickremesinghe told The Associated Press in a recent interview that he would consider buying oil from Russia at steeper discount prices.
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Kurtenbach, AP Asia business editor, contributed from Bangkok.
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