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What Went Wrong With Sri Lanka’s Economy?

Sri Lanka is in the midst of its greatest economic crisis in decades, with the Mahinda Rajapaksa government unable to pay for basic imports following a 70% decline in foreign exchange reserves over two years, which prompted a currency devaluation and efforts to seek assistance from international lenders.

As the government prepares for talks with the International Monetary Fund over concerns about the country’s ability to pay $4 billion in foreign debts this year, including a $1 billion international sovereign bond that matures in July, fuel is in short supply, food and essential commodity prices have risen sharply, and protests have erupted.

According to Reuters, Sri Lanka’s reserves are down to $2.31 billion.

The IMF has stated that it is willing to assist. The Sri Lankan government is scheduled to hold discussions in April, but the World Bank has issued a caution. According to a report released on Friday, the island nation is facing’solvency’ concerns as a result of unsustainable debt levels.

In August, the IMF provided $787 million in pandemic assistance to Sri Lanka.

According to Reuters, Sri Lanka’s finance minister, Basil Rajapaksa, will meet with World Bank officials next month to seek assistance from the Washington-based organisation.

What went wrong with Sri Lanka’s economy?

In addition to the impact of the COVID-19 pandemic, the crisis is often attributed to mismanagement of government finances and ill-timed tax cuts.

Fuel prices have risen by 40% in a week due to the conflict in Ukraine.

Sri Lanka is essentially bankrupt; according to some estimates, it owes around 119 percent of its GDP, implying that it has borrowed more money than it can create through goods and services.

Who are the creditors of Sri Lanka?

China and the Asian Development Bank are the primary creditors. International government bonds account for 36.4% of Sri Lanka’s debt, with the ADB (14.6%), Japan (10.9%), and China (10.8%) following closely behind.

India has already provided Sri Lanka with a $1 billion line of credit to assist with the purchase of fuel, food, and medication. Colombo requested an additional $1.5 billion this week, according to the governor of the country’s central bank.

Furthermore, a $500 million credit has been issued for a cargo of 40,000 tonnes of diesel to help alleviate the country’s chronic fuel shortfall.

India has also agreed to extend a $400 million currency swap and postpone a $515.2 million payment to the Asian Clearing Union (ACU) for two months.

Over the last decade, China has contributed billions to infrastructure projects such as ports and a coal power plant as part of its Belt and Road Initiative (BRI).

Sri Lanka has urged China to restructure $3.5 billion in debt repayments.

Is it really that bad?

People are fleeing Sri Lanka and attempting to enter India, which is bad enough.

Last week, 16 Sri Lankans boarded unauthorised ships to India, including eight children. The Coast Guard intercepted them off the coast of Tamil Nadu. They are being looked after by the government, but they will very definitely not be the last refugees.

Reuters reports show heartbreaking experiences from Sri Lanka’s lower classes, many of whom are now compelled to work two jobs to make ends meet.

Last week, 16 Sri Lankans boarded unauthorised ships to India, including eight children. The Coast Guard intercepted them off the coast of Tamil Nadu. They are being looked after by the government, but they will very definitely not be the last refugees.

Reuters reports show heartbreaking experiences from Sri Lanka’s lower classes, many of whom are now compelled to flee the country.

Indika Perera, 43, a security guard at a private enterprise in Colombo, said, “We can’t exist here any longer.” Perera now spends more than half of his pay on groceries for his family, but his three children still only get rice once a day.

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