Sri Lanka faces a worsening financial and humanitarian crisis and fears bankruptcy in 2022 as inflation hits record highs, food prices skyrocket and its coffers run low.
The collapse facing the government, led by the strongman of President Gotabaya Rajapaksa, is in part caused by the immediate impact of the Covid crisis and the loss of tourism, but is compounded by high government spending and tax cuts that erode state revenues, large debt repayments to China and foreign exchange reserves to their lowest levels in a decade. Meanwhile, inflation was boosted by the government printing money to repay domestic loans and foreign bonds.
The World Bank estimates 500,000 people have fallen below the poverty line since the start of the pandemic, the equivalent of five years of progress in the fight against poverty.
Inflation hit an all-time high of 11.1% in November and escalating prices have left those who were previously well off struggling to feed their families, while basic commodities are now unaffordable for many. After Rajapaksa declared Sri Lanka to be in an economic emergency, the military was given the power to ensure essential items, including rice and sugar, were sold at prices set by the government – But it did little to alleviate the plight of the people.
Anurudda Paranagama, a driver in the capital, Colombo, took a second job to pay for the rising food prices and cover his car loan, but it was not enough. âIt’s very difficult for me to repay the loan. When I have to pay electricity and water bills and spend on food, there is no more money, âhe said, adding that his family now eats two meals a day instead of three.
He described how the grocer in his village opened 1kg packets of powdered milk and divided them into 100g packets because his customers could not afford the entire packet. âWe are now buying 100g of beans while we were buying 1kg for the week,â Paranagama said.
The loss of jobs and vital foreign income from tourism, which typically contributes over 10% of GDP, has been substantial, with over 200,000 people losing their livelihoods in the travel and tourism sectors, according to the World Travel and Tourism Council.
The situation got so bad that long queues formed at the passport office, as one in four Sri Lankans, mainly young and educated, say they want to leave the country. For older citizens, it is reminiscent of the early 1970s, when import controls and low production in the country caused severe shortages of basic commodities and long queues for bread, milk and wine. rice.
Former central bank deputy governor WA Wijewardena warned that the struggles of ordinary people would exacerbate the financial crisis, making life more difficult for them. “When the economic crisis worsens beyond redemption, it is inevitable that the country will also experience a financial crisis,” he said. âBoth will reduce food security by reducing production and failing to import due to the shortage of foreign exchange. At this point, it will be a humanitarian crisis.
One of the most pressing problems for Sri Lanka is the enormous burden of its external debt, especially to China. It owes China more than $ 5 billion in debt and took an additional $ 1 billion loan from Beijing last year to help it cope with its acute financial crisis, which is being paid in installments. .
Over the next 12 months, in the public and private sector, Sri Lanka will have to repay around $ 7.3 billion in domestic and foreign loans, including a repayment of international sovereign bonds of $ 500 million in January. However, in November, the available foreign exchange reserves were only $ 1.6 billion.
In a usual approach, government minister Ramesh Pathirana said they hoped to settle their past oil debts with Iran by paying them off with tea, sending them $ 5 million worth of tea each month to save “money.” much needed currency â.
Opposition MP and economist Harsha de Silva recently told parliament that foreign exchange reserves would be -437 million dollars by January of next year, while the total foreign debt to be repaid would be 4.8 billion dollars from February to October 2022. âThe nation will be totally in bankruptcy, âhe said.
Central Bank Governor Ajith Nivard Cabraal has publicly assured Sri Lanka could repay its debts “transparently”, but Wijewardena said the country was at high risk of defaulting, which would have catastrophic economic consequences.
Meanwhile, Rajapaksa’s sudden decision in May to ban all fertilizers and pesticides and force farmers to switch to organic without warning brought a once-prosperous farming community to its knees, as many farmers, who had grown accustomed to it, brought to their knees. using – and often overdoing – fertilizers and pesticides, suddenly found themselves without the means to produce healthy crops or to control weeds and insects. Many fearful of a loss decided not to farm at all, exacerbating food shortages in Sri Lanka.
The government turned around at the end of October and farmers are now struggling to meet the high costs of imported fertilizers without assistance.
“The costs of growing rice [wheat] have increased astronomicallyâ¦ The government has no money for fertilizer subsidies. Many of us farmers are reluctant to invest money because we don’t know if we are going to make a profit, âsaid one farmer, Ranjit Hulugalle.
In an attempt to temporarily alleviate the problems and avoid difficult and most likely unpopular policies, the government resorted to temporary relief measures, such as lines of credit to import food, medicine and fuel from its neighboring ally. India, as well as Indian currency swaps, China and Bangladesh and ready to buy Oman oil. However, these loans offer only short-term relief and must be repaid quickly at high interest rates, adding to Sri Lanka’s debt load.
Anushka Shanuka, a personal trainer, was among those who had a comfortable life but is now struggling to cope. “We can no longer live as before the pandemic,” he said, saying the prices of vegetables had increased by more than 50%.
âThe government promised to help us but nothing came, so we are managing as best we can. I don’t know how long we can go on like this.