2 December, 2021

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Will Sri Lanka’s Economic Crisis Affect Its Future?

Jeevethan Selvachandran says that the harm caused by the COVID-19 epidemic, coupled with the growing financial crisis, poses a severe danger to Sri Lanka’s growth.

There has been a virtual standstill in worldwide travel and media because of the COVID-19 outbreak that began in March of 2020. While affluent nations are making headway in returning to normality, countries that are still developing have a long way to go before they can talk about a full pandemic recovery and future growth. Sri Lanka, a democratically precarious but war-torn country, is one among them.

Sri Lanka is now dealing with a debt issue in addition to the Ebola outbreak. By the 25th of July, Sri Lanka had managed to pay back a $1 billion foreign currency bond, but there are two more payments due in 2022 and 2023 – two bonds of $1.5 billion and $1.25 billion.

Several restrictions have been implemented to limit the amount of foreign currency that may be sent abroad. The initial payment was funded by using foreign exchange reserves. Thus, requests have been made for aid from the International Monetary Fund (IMF) in overcoming the current economic downturn.

Since the year 2020, Sri Lanka has placed import limits on motor cars, agricultural items, and consumer durables in an effort to reduce the country’s monetary outflow. Foreign reserves, according to Brokers Online, have decreased to $2.8 billion in July from $7.5 billion in November 2019, when the Rajapaksa-led administration took office. Since 2019, the Sri Lankan Rupee’s value versus the US Dollar has fallen by almost 20%, leading the Central Bank of Sri Lanka to raise interest rates in an effort to support the local currency.

Because of the depreciation of the rupee, repayments will be more expensive. Despite efforts to stem the crisis, imports of tea, rubber, seafood, and clothes continue to outpace exports because of growing costs and insufficient income.

Fitch Ratings then lowered the nation’s credit rating to CCC, suggesting that investing in the country carries significant risk.

And to top it all off, allegations of human rights breaches have put Sri Lanka’s lucrative preferential trade position with the European Union at risk. If the European Union upholds the decision to terminate this, then the United Kingdom may do the same. Exports to these two markets account for 30% of Sri Lanka’s overall exports, therefore any disruption would be devastating.

What Will Be In The Future?

For the time being, China is ready to lend, but the future is anything but certain. As long as India refuses to do the same, China may find it less strategic to finance Sri Lanka.

Worse, the currency crisis has coupled with the severe economic effect of the epidemic to significantly impair the economy of Sri Lanka, which was heavily reliant on tourism, investments, exports, and remittances – all sectors susceptible to the virus.

A growth strategy based on exports and private investment is recommended in the country’s development report for 2021.

The poor financial situation in Sri Lanka reveals unequivocally that reform is essential if the country is to prosper. Due to the current crisis, financial analyst Dr. Nishan De Mel said that Sri Lanka needs “a publicly-backed strategy that would build [investment] trust” more than anything else.

Nevertheless, in order to get there, actions like these must be taken right now. Otherwise, the situation in Sri Lanka might become worse.

Sri Lanka And Food Emergency

There are food shortages in Sri Lanka, which is the result of people stockpiling food because private banks are running out of foreign cash to pay for imports, the government says.

President Gotabaya Rajapaksa said on Tuesday that he has invoked emergency measures to prevent the stockpiling of basic supplies like sugar, rice, and other staples in the midst of the country’s deep economic crisis.

In order to defraud customers and profit, some dishonest businessmen have fabricated a scarcity of goods. Director general of government information Mohan Samaranayake told Al Jazeera in a written statement that the rules had dealt with the matter.

The laws provide authorities broad authority to confiscate food supplies held by dealers, arrest persons who hoard critical foods and regulate the price of food via the government.

As a result of the increase in the number of COVID-19 cases across the nation, sugar, rice, onions, and potatoes have all seen price increases.

There are reports that certain merchants are stockpiling food supplies to the detriment of the general population by creating shortages. Trade Minister Bandula Gunawardena confirmed these reports.

Despite increasing fines for food hoarding, the shortages continue as the 21 million-person nation confronts a deadly coronavirus outbreak that is taking more than 200 people every day.

Because of the epidemic, the economy contracted by a record-breaking 3.6% in 2020, and the government prohibited the importation of automobiles and other goods in March last year, including edible oils and turmeric, an important spice in local cookery, in an effort to preserve foreign cash.

As the director general of government information, Samaranayake underlined, the economic prognosis for this year shows a projected rise of 4.5%.

The problem is that importers claim they can’t get enough funds to cover the costs of the food and medication they are permitted to purchase.

 

 

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