Explained: 10 things about Sri Lanka’s worst economic crisis

Explained: 10 things about Sri Lanka’s worst economic crisis

NEW DELHI: Sri Lanka’s economic crisis, unparalleled since its independence in 1948, has come from the confluence of the Covid-19 pandemic battering the tourism-reliant economy, rising oil prices and populist tax cuts by the government of President Gotabaya Rajapaksa and his brother, Mahinda, who resigned as prime minister last week.
Besides, factors like heavily subsidised domestic prices of fuel and a decision to ban the import of chemical fertilisers, which devastated the agriculture sector, also added fuel to the fire.
Shortages of almost everything from food, medicines to cooking gas have resulted into social unrest and political turmoil.

Sri lanka debt 3.

* Key macroeconomic figures fall
Sri Lanka was a model for emerging market economies and grew at an average rate of 6.2% between 2010 and 2016, according to World Bank figures. In the next three years, the figure dropped to 3.1%.
The World Bank has forecast the economy will grow 2.4% this year from 3.5% in 2021 but has said the outlook is highly uncertain.

The country now faces a fiscal deficit amounting to 13% of the gross domestic product (GDP).
In addition, the chronic foreign exchange shortage has led to rampant inflation — with prices surging almost 30%, food prices sky-rocketed by 46.6% year-on-year.
The Sri Lankan central bank is about to hold a rate meeting on Thursday and is likely to raise rates for a fourth consecutive time this year.

* No petrol, 15 hours power cut
Sri Lanka has no dollars to pay for petrol shipments, Power and Energy Minister Kanchana Wijesekera told parliament, appealing to people to stop queuing for the next two days.
In Colombo, the commercial capital, no petrol was to be found at most service stations on Wednesday. Long lines of auto-rickshaws, the city’s most popular mode of transport, and other vehicles were parked in front, waiting for supplies.
“Any petrol station you go, there is no fuel, and people (are) lined up for kilometres and kilometres,” said Mohammad, a delivery driver who only gave one name. “So, how can you run a vehicle, right? How can you do your daily…day-to-day activities?”

Power cuts could extend to as much as 15 hours a day because of the lack of fuel, which is mostly imported.
A petrol shipment has been at Colombo port since March 28 but the government has been unable to pay, he added.
“There aren’t enough dollars available to open letters of credit,” he said.
“We are working to find funds but petrol will not be available at least until the weekend. The very small reserve stock of petrol is being released for essential services like ambulances,” he said.

sri lanka inflation gfx.

* Currency plunges 33% against US dollar
Sri Lankan rupee depreciated against the US dollar by 33 per cent during the year up to April 1, 2022.
Given the cross currency exchange rate movements, the Sri Lankan rupee depreciated against the Indian rupee by 31.6 per cent, the euro by 31.5 per cent, the pound sterling by 31.1 per cent and the Japanese yen by 28.7 per cent during this period.

The Central Bank of Sri Lanka, with immediate effect, set an exchange rate limit of 230 rupees per dollar compared to a limit of 200-203 that had prevailed since October.
In December, CBSL announced a host of measures including giving an additional 10 rupees per dollar as an incentive but this had limited impact with remittances dropping 61.6 per cent in January to $259 million from $675 million a year earlier.

* $7 billion foreign loans due
The country is nearly bankrupt and has suspended repayment of about $7 billion in foreign loans due this year out of $25 billion to be repaid by 2026.
It’s total foreign debt is $51 billion. The finance ministry says the country currently has only $25 million in usable foreign reserves.
“I have no desire to hide the truth and to lie to the public. Although these facts are unpleasant and terrifying, this is the true situation. For a short period, our future will be even more difficult than the tough times that we have passed,” Wickremesinghe said.
“We will face considerable challenges and adversity. However, this period will not be long,” he said, adding that countries with which he has spoken have pledged to help in the next few months.

sri lanka debt 4.

* Tackling 13% budget deficit for 2022
Wickremesinghe, who was appointed last Thursday, has already said he will be forced to boost energy prices and will bring in a new budget that will increase tax increases as the government attempts to tackle a 13% budget deficit for 2022.
Charles Robertson, global chief economist at Renaissance Capital in London, said the removal of electricity and fuel price subsidies was essential.

“We will also have to see massive tax hikes, probably a doubling of VAT from 8% to at least back to the 15% we saw in 2019,” Robertson said. “It was the cut in those VAT rates which contributed to this crisis.”
* $75 million needed to keep economy running
Foreign reserves had come close to zero from $7.5 billion in November 2019, Prime Minister Ranil Wickremesinghe said in a televised address, with the country requiring $75 million in the next few days to keep the economy running.
Wickremesinghe said he planned to ask for foreign assistance, privatise SriLankan Airlines and seek parliamentary approval to increase Treasury bill issuance to Rs 4 lakh crore ($11.27 billion) from Rs 3 lakh crore.
“For a short period, our future will be even more difficult than the tough times that we have passed,” he said.

* Rs 37,200 crore – Sri Lankan Airlines’ loss
Sri Lanka’s new PM has proposed to privatise the national carrier SriLankan Airlnes as part of his plan to help tackle the debt-ridden country’s crippling economic and political crisis.
“In the 20/21 year alone its loss was Rs 4,500 crore. By March 31, 2021, its total losses were Rs 37,200 crore,” the prime minister said while announcing other measures to tackle the problems faced by Sri Lanka’s economy.
“Even if we privatise it we have to bear the loss,” he said.
* $160 million received in bridge financing from World Bank
Prime Minister Ranil Wickremesinghe said the country had secured $160 million in bridge financing from the World Bank, but it was not clear if the funds could be used for fuel payments.
“We are working to see if these funds can be used for fuel imports,” Wickremesinghe told the country’s parliament.
“The statistics have gone haywire,” he said. “But the reality is we don’t even have $1 million.”
* India extends current credit line by $200 million
India extended its current credit line by a further $200 million to replenish Sri Lanka’s rapidly depleting fuel stocks, power and energy minister Kanchana Wijesekera said earlier this month.

“India has already given an additional $200 million which will be used for another 4 shipments (in May). Apart from this we are also in discussion with India for another $500 million credit line, but this is not finalised yet,” Wijesekara said.
Recently, India provided about $1.9 billion in swaps and credit lines to Sri Lanka.
* Gold could be last resort
Sri Lankans may sell as much as 20% more gold this year as people in extreme distress sell their jewelry to raise funds, according to Chirag Sheth, a consultant at London-based Metals Focus Ltd.
Citizens had sold about 7 tons in 2021, he said. Demand for the precious metal had dropped by a third in the island nation from the pre-pandemic years as tourism took a hit.
While old gold sales are “very strong,” the metal is also turning out to be the last resort for people who do have some money to park their funds as “you cannot put your money in stocks, banks interest rate is lower and your local currency is depreciating,” Sheth said.
(With inputs from agencies)

Source link

Author: Shirley