Sri Lanka battling a grave economic crisis

Sri Lanka is facing the double whammy of high debt and rising prices, sparking protests from citizens due to widespread shortages of food and fuel.

The crisis may further aggravate with global crude prices rising to a 14-year high while wheat prices are also increasing due to disruption in the supply chain from the Russia-Ukraine war.

According to government data, China accounted for about 10 percent of Sri Lanka's USD 35 billion foreign debts till April 2021. However, experts believe that China's total lending could be much higher when taking into account loans to state-owned enterprises and the Sri Lankan central bank.

Sri Lanka's lead industry tourism could also face ripple effects from the ongoing Russia-Ukraine conflict. Of the total tourism arrivals of 82,327 in the month of January 2022, roughly 26 percent were from these countries.

Meanwhile, the IMF has noted that the country faces mounting challenges, including public debt that has risen to unsustainable levels, low international reserves, and persistently large financing needs in the coming years.

The country's official reserves fell to USD 2.36 billion in January 2022 compared with USD 3.1 billion in December 2021. Colombo's next big challenge is a USD 1 billion bond repayment due in July 2022. To emerge from this crisis, Sri Lanka's most pragmatic option would be rescheduling its external debt. Delaying capital payments would create some space for the country to build up reserves and pay for critical imports including food.

Against this backdrop, President Gotabaya Rajapaksa is believed to be disappointed over Beijing's failure to restructure and reschedule loans and concessional trade-credit scheme on imports, despite requesting for the same in his recent (Jan 2022) meeting. Rajapaksha's request to Chinese President Xi Jinping also went unanswered.

Incidentally, Gateway House, an independent think-tank noted that Chinese debt and equity in SL were funding over 50 projects worth more than USD 11 billion up to 2017. Further, it noted that interests in some Chinese loans are as high as 6.5 percent compared to 2.5-3 percent for Asian Development Bank loans. Independent observers estimate that Chinese state-owned enterprises and central banks' current loans might have even crossed USD 15 billion.

With Beijing letting the country down in times of crisis, Rajapaksawas keen to improve relations with the West and dispel the pro-China image of his government. He was now apparently amenable to approaching the International Monetary Fund (IMF) for a bailout package to increase Colombo's credibility as he believes that the IMF is fairly flexible in its policy prescriptions. He was hopeful of using Indian clout in getting favorable terms from the IMF.

Colombo was also looking at improving productivity and performance of economic sectors as well as attracting investment from Indian companies in renewable energy projects. It plans to offer incentives like assured power, tax holidays and quick clearances for IT companies interested to invest in IT parks in Galle, Kurunegala, and Kandy. It also intends to benefit from the global outreach of the Indian IT sector. To improve the performance of the Sri Lanka Railways, Colombo has sought help from Indian Railway'stoo.

India's recent financial and oil assistance to Sri Lanka has been deeply appreciated. The International Sovereign Bond payment of USD 500 million on January 18 was facilitated through timely SWAP from the Reserve Bank of India and the deferral of payment to India under the Asian Clearing Union (ACU).

Though Colombo has foreign debt obligations of around USD 7 billion in 2022, Ajith Nivard Cabraal, the governor of the Central Bank was optimistic, stating that the country would be able to pull through the crisis by taking some hard and pragmatic decisions. But harsh measures to contain economic crisis may not be very palatable to the public. governor of the Central Bank owes over USD 45 billion in long-term debt.

Known external debt repayments of Sri Lanka would be USD 26 billion (USD 5 billion/year) over the next five years, which would constitute over 80 percent of government revenue in 2020.