Severe economic crisis: Sri Lanka faces bankruptcy

Status: 05/18/2022 17:15

No electricity, no drugs, gasoline supplies last only a few days – Sri Lanka is experiencing its worst economic crisis since independence. Now it can go bankrupt for the first time.

Sibylle Licht, ARD Studio New Delhi

Mohamad Irshaf pushes his rickshaw to a gas station. He needs gasoline, which not only has increased in price, but is also rationed. “I was only at a different gas station, four vehicles ahead of me ran out of gas. I’m standing here now. I don’t know if I can refuel at all, but I have to try. Sri Lanka is running out of gas. It will only last for a short time, says Sri Lanka’s newly appointed prime minister, Ranil Wickremesinghe.

Sri Lanka is experiencing its worst economic crisis since independence in 1948, with power cuts, food shortages and a declining currency. The country has been hit hard by the Covid-19 pandemic. Tourism, which is important to the economy, has largely stalled. Rising oil prices in the world market and populist tax cuts by the government of President Gotabaya Rajapaksa and his brother Mahinda have contributed to the economic crisis.

Other factors include heavily subsidized fuel prices and the decision to ban the import of chemical fertilizers. This ruined the agricultural sector. As Sri Lanka has a shortage of foreign currencies, medicines, fuel and other essential goods are running out and have to be imported.

Once a role model for emerging countries

Sri Lanka has been recognized as a role model for emerging countries. According to the World Bank, in 2010-2016 the country’s economy grew by an average of 6.2 percent. However, by 2019, the growth rate had dropped to 3.1%.

Sri Lanka has been in turmoil for weeks. Nine people were killed in the protests, more than 300 were injured and many demonstrators were arrested. Prime Minister Mahinda Rajapaksa was eventually forced to resign. His brother, President Gotabayaz, appointed his longtime opponent Ranil Wickremesinghe as head of government. It should restore stability to the country in order to be able to conduct rescue talks with the International Monetary Fund and the World Bank.

Because Sri Lanka is threatened with insolvency. The grace period for two outstanding foreign bonds expires today, May 18. An island country can be declared insolvent if it does not pay interest immediately to the bondholders. This would be the first time in the history of the country.

Exhausted currency reserves

Already in mid-April, the government announced that it would stop paying off foreign debt in order to have dollars to import food and fuel. Only days later, the country stopped paying its dollar bonds. The S&P Global Ratings rating agency then announced Sri Lanka’s selective default.

Foreign exchange reserves fell from $ 7.5 billion in November 2019 to almost zero today, Prime Minister Ranil Wickremesinghe said in a televised speech. Sri Lanka needs $ 75 million over the next few days to sustain the economy. The important drugs were over, the gasoline was only enough for two days. The prime minister prepared the inhabitants for the hard months.

Sri Lanka has been negotiating a currency injection with the International Monetary Fund and the World Bank since March, according to Colombo Chamber of Commerce chief economist Shiran Fernando. The country also wants to shift its external debt. For Fernando, this alone is not enough: “The country needs reform. They have nothing to do with the International Monetary Fund. ‘

The sectors of the labor market, agriculture and trade would have to be reformed. Only in this way can medium and long-term effects be achieved. “Sri Lanka has had significant budget deficits in the past decades, which we have ignored. We should have engaged the International Monetary Fund sooner. And we have never implemented any really difficult reforms. Exports and tax revenues fell. The state’s influence on the economy has increased significantly. “

India helps with fuel

“The resignation of Prime Minister Rajapaksa was really necessary,” said Dean Tyler, head of global markets at BancTrust & Co in London. The Sri Lankan currency has improved somewhat since then. The London-based investment bank operates worldwide and specializes in emerging markets.

The new prime minister, Ranil Wickremesinghe, is still looking for a finance minister to accompany him after the last one threw himself into the towel after his day in office. The central bank governor also threatened to resign if the country does not stabilize politically quickly. He intends to submit his report on the country’s financial situation on May 19.

India offered to indebted Sri Lanka 12 deliveries of fuel, a total of 400,000 tons of diesel fuel. Many petrol stations say “Gasoline sold out”.

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