Explained: Sri Lanka’s economic crisis and India’s $2.5 billion line of credit | world news

Sri Lanka is facing its worst economic crisis in decades, with the Mahinda Rajapaksa government struggling to pay for essential imports after a 70% drop in foreign exchange reserves over two years triggered a devaluation of the currency and efforts to seek help from global lenders. Fuel is scarce, food and basic commodity prices have risen sharply and protests have erupted as the government prepares for talks with the International Monetary Fund amid concerns over the country’s ability to pay 4 billion in foreign debt this year, including $1 billion in international sovereign bonds maturing in July.

Reuters estimates that Sri Lanka has only $2.31 billion in reserves left.

The IMF has indicated that it is ready to help. The Sri Lankan government is due to hold talks in April, but the global financial body has issued a warning. A report on Friday said the island nation is facing “solvency” issues due to risks from unsustainable levels of debt.

Sri Lanka received $787 million in pandemic aid from the IMF in August.

Sources told Reuters that Sri Lanka’s Finance Minister Basil Rajapaksa will also meet with World Bank officials next month to seek support from the US-headquartered agency.

What happened to the Sri Lankan economy?

The crisis is widely seen as the result of poor public finance management and untimely tax cuts, in addition to the impact of the COVID-19 pandemic.

The war in Ukraine didn’t help either; fuel costs jumped 40% in one week.

Essentially, Sri Lanka is deeply in debt – by some estimates it owes around 119% of its GDP, meaning it has borrowed more money than it can produce through goods and services.

Who are Sri Lanka’s creditors?

The main creditors are China and the Asian Development Bank. 36.4% of Sri Lanka’s debt is international sovereign bonds, with AfDB (14.6%), Japan (10.9%) and China (10.8%) next on the list.

India has already extended a billion dollar line of credit to help Sri Lanka buy fuel, food and medicine. This week, Colombo requested an additional $1.5 billion, the governor of that country’s central bank told Reuters.

In addition, a credit of 500 million dollars was granted for a shipment of 40,000 tons of diesel to alleviate the serious shortage of fuel in this country.

India also extended a $400 million currency swap and $515.2 million deferred payment to the Asian Clearing Union (ACU) for two months.

READ: India extends $1 billion line of credit to Sri Lanka

China has lent billions – through its Belt and Road Initiative (BRI) – over the past decade for infrastructure projects such as ports and a coal-fired power plant.

Sri Lanka has asked China to restructure debt repayments of about $3.5 billion.

How bad is that?

Bad enough that people are now fleeing Sri Lanka and trying to enter India.

Last week, 16 Sri Lankans, including eight children, boarded illegal ferries to India. They were intercepted by the Coast Guard off the coast of Tamil Nadu. The state takes care of them but they will certainly not be the last refugees.

Reuters reports reveal harrowing stories of Sri Lanka’s less privileged classes, many of whom are now being forced into second jobs just to survive.

“We can’t survive here anymore,” said Indika Perera, 43, a security guard at a private company in Colombo. Perera now spends more than half his salary on groceries for his family, but still cannot get more than rice once a day for his three children.

READ: Six Sri Lankans caught entering India illegally, trying to flee crisis

The crisis has spawned long queues outside petrol stations – which are now guarded by soldiers to avoid a riot-like situation.

School exams were canceled due to lack of paper.

On Tuesday, Indian Foreign Minister S Jaishankar had to step in to help a Sri Lankan hospital which suspended operations due to lack of medical facilities.

READ: Foreign Minister’s response to Sri Lanka’s tweet – “Disturbed….”

How bad can it get?

Since November, rating agencies such as Moody’s, Fitch and Standard & Poor’s have all downgraded Sri Lanka due to default issues.

Fitch estimates that Sri Lanka will also need to arrange $2.4 billion to help the country’s public and private companies meet their 2022 debts; these will be added to the central government’s $4.5 billion debt.

The country also needs about $20 billion for essential imports such as fuel, food and intermediate goods for exports.

What are the experts saying?

Some experts believe that Sri Lanka should establish a three-year repayment structure. This would ease the burden on Sri Lankan citizens.

“Sri Lanka has made an unreasonable commitment to debt repayment. It is more prudent to suspend debt repayment and meet critical economic needs,” the executive director and economist of Verité Research told Reuters. Dr. Nishan from Mel.

With contributions from Bloomberg, Reuters


    Chandrashekar Srinivasan is an editor at the Hindustan Times. Journalist with more than 11 years of experience in print and digital media, he is also a graduate in sociology and economics. He has worked in political, business, sports and entertainment news, but he is happiest watching football.
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