Sri Lanka is facing a deepening financial and humanitarian crisis, with fears it could go bankrupt this year as inflation rises to record levels, food prices rocket and its coffers run dry.
The meltdown faced by the government, led by Sri Lankan President Gotabaya Rajapaksa, is in part caused by the immediate impact of the COVID-19 pandemic and the loss of tourism, but is compounded by high government spending and tax cuts eroding state revenue, vast debt repayments to China and foreign exchange reserves at their lowest levels in a decade.
Meanwhile, inflation has been spurred by the Sri Lankan government printing money to pay off domestic loans and foreign bonds.
Photo: Reuters
The World Bank estimates 500,000 people have fallen below the poverty line since the beginning of the pandemic, the equivalent of five years’ progress in fighting poverty.
Inflation hit a record high of 11.1 percent in November and escalating prices have left those who were previously well off struggling to feed their families, while basic goods are now unaffordable for many.
After Rajapaksa declared Sri Lanka to be in an economic emergency, the military was given power to ensure essential items, including rice and sugar, were sold at set government prices — but it has done little to ease people’s woes.
Anurudda Paranagama, a chauffeur in the capital, Colombo, took on a second job to pay for rising food costs and cover the loan on his vehicle, but it was not enough.
“It is very difficult for me to repay the loan. When I have to pay electricity and water bills, and spend on food, there is no money left,” Paranagama said, adding that his family now eats two meals a day instead of three.
He described how his village grocer was opening 1kg packets of milk powder and dividing it into packs of 100g because his customers could not afford the whole packet.
“We now buy 100g of beans when we used to buy 1kg for the week,” he said.
The loss of jobs and vital foreign revenue from tourism, which usually contributes more than 10 percent of GDP, has been substantial, with more than 200,000 people losing their livelihoods in the travel and tourism sectors, according to the World Travel and Tourism Council.
The situation has got so bad that long lines have formed at the passport office as one in four Sri Lankans, mostly the young and educated, say they want to leave the nation. For older citizens, it is reminiscent of the early 1970s when import controls and low production at home caused severe shortages of basic commodities and caused people to line up for bread, milk and rice.
Former Sri Lankan central bank deputy governor W.A. Wijewardena said that the struggles of ordinary people would exacerbate the financial crisis, which would in turn make life harder for them.
“When the economic crisis deepens beyond redemption, it is inevitable that the country will have a financial crisis, too,” Wijewardena said. “Both will reduce food security by lowering production and failing to import due to foreign exchange scarcities. At that point, it will be a humanitarian crisis.”
One of the most pressing problems for Sri Lanka is its huge foreign debt burden, in particular to China. It owes China more than US$5 billion in debt and last year took an additional US$1 billion loan from Beijing to help with its acute financial crisis, which is being paid in installments.
In the next 12 months, in the government and private sector, Sri Lanka will be required to repay an estimated US$7.3 billion in domestic and foreign loans, including a US$500 million international sovereign bond repayment this month.
However, as of November, available foreign currency reserves were just US$1.6 billion.
In an unusual approach, Sri Lankan Minister of Plantation Ramesh Pathirana said that the government hoped to settle their past oil debts with Iran by paying with tea, sending US$5 million of tea every month to save “much-needed currency.”
Opposition lawmaker and economist Harsha de Silva recently told parliament that foreign currency reserves would be minus-US$437 million by January next year, while the total foreign debt to service would be US$4.8 billion from February to October this year.
“The nation will be totally bankrupt,” he said.
Sri Lanka central bank Governor Ajith Nivard Cabraal made public assurances that the nation could pay off its debts “seamlessly,” but Wijewardena said that the nation was at substantial risk of defaulting on its repayments, which would have catastrophic economic consequences.
Meanwhile, Rajapaksa’s sudden decision in May last year to ban all fertilizer and pesticides, and force farmers to go organic without warning, has brought a formerly prosperous agricultural community to its knees, as many farmers, who had become used to using — and often overusing — fertilizer and pesticides, were suddenly left without ways to produce healthy crops or combat weeds and insects.
Many fearing a loss decided not to cultivate crops at all, adding to the food shortages in the nation.
The government made a dramatic U-turn in late October and farmers are now struggling to cover the high costs of imported fertilizer without help.
“The costs of cultivating paddy [wheat] have gone up astronomically... The government has no money for fertilizer subsidies. Many of us farmers are reluctant to invest money because we don’t know if we will make any profit,” farmer Ranjit Hulugalle said.
In an attempt to temporarily ease the problems, and stave off difficult and most likely unpopular policies, the government has resorted to temporary relief measures, such as credit lines to import foods, medicines and fuel from neighboring India, as well as currency swaps from India, China and Bangladesh, and loans to purchase gasoline from Oman.
However, the loans provide only short-term relief and have to be paid back quickly at high interest rates, adding to Sri Lanka’s debt load.
Anushka Shanuka, a personal trainer, was among those who used to have a comfortable life, but now is struggling to get by.
“We can’t live the way we used to before the pandemic,” Shanuka said, adding that the prices of vegetables had gone up by more than 50 percent. “The government promised to help us, but nothing came, so we are just managing the best we can. I don’t know how much longer we can go on like this.”
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