‘There is no money left’: Covid crisis leaves Sri Lanka on brink of bankruptcy

Half a million people have sunk into poverty since the pandemic struck, with rising costs forcing many to cut back on food

2 February by Minoli de Soysa , Hannah Ellis-Petersen


Sri Lanka is facing a deepening financial and humanitarian crisis with fears it could go bankrupt in 2022 as inflation rises to record levels, food prices rocket and its coffers run dry.

The meltdown faced by the government, led by the strongman 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 eroding state revenues, vast debt repayments to China and foreign exchange reserves at their lowest levels in a decade. Inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. has meanwhile been spurred by the government printing money to pay off domestic loans and foreign bonds.

The World Bank estimates 500,000 people have fallen below the poverty line since the beginning of the pandemic, the equivalent of five years’ progress in fighting poverty.

Inflation hit a record high of 11.1% in November and escalating prices have left those who were previously well off struggling to feed their families, while basic goods 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 set government prices – but it has done little to ease people’s woes.

Anurudda Paranagama, a chauffeur in the capital, Colombo, took on a second job to pay for rising food costs and cover the loan on his car but it was not enough. “It is very difficult for me to repay the loan. When I have to pay electricity and water bills and spend on food, there is no money left,” he said, adding that his family now eats two meals a day instead of three.

He described how his village grocer was opening 1kg packets of milk powder and dividing it into packs of 100g because his customers could not afford the whole packet. “We now buy 100g of beans when we used to buy 1kg for the week,” said Paranagama.

The loss of jobs and vital foreign revenue from tourism, which usually contributes more than 10% of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
, has been substantial, with more than 200,000 people losing their livelihoods in the travel and tourism sectors, according to the World Travel and Tourism Council.

The situation has got so bad that long queues have formed at the passport office as one in four Sri Lankans, mostly the 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 at home caused severe shortages of basic commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. and caused long queues for bread, milk and rice.

The former central bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
deputy governor WA Wijewardena warned the struggles of ordinary people would exacerbate the financial crisis, which would in turn make life harder for them. “When the economic crisis deepens beyond redemption, it is inevitable that the country will have a financial crisis too,” he said. “Both will reduce food security by lowering production and failing to import due to foreign exchange scarcities. At that point, it will be a humanitarian crisis.”

One of the most pressing problems for Sri Lanka is its huge foreign debt burden, in particular to China. It owes China more than $5bn in debt and last year took an additional $1bn loan from Beijing to help with its acute financial crisis, which is being paid in instalments.

In the next 12 months, in the government and private sector, Sri Lanka will be required to repay an estimated $7.3bn in domestic and foreign loans, including a $500m international sovereign bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. repayment in January. However, as of November, available foreign currency reserves were just $1.6bn.

In an usual approach, government minister Ramesh Pathirana said they hoped to settle their past oil debts with Iran by paying them with tea, sending them $5m worth of tea every month in order to save “much-needed currency”.

The opposition MP and economist Harsha de Silva recently told parliament that foreign currency reserves would be -$437m by January next year, while the total foreign debt to service would be $4.8bn from February to October 2022. “The nation will be totally bankrupt,” he said.

Central Bank Governor Ajith Nivard Cabraal made public assurances that Sri Lanka could pay off its debts “seamlessly” but Wijewardena said the country was at substantial risk of defaulting on its repayments, which would have catastrophic economic consequences.

Meanwhile, Rajapaksa’s sudden decision in May to ban all fertiliser and pesticides and force farmers to go organic without warning has brought a formerly prosperous agricultural community to its knees as many farmers, who had become used to using – and often overusing – fertiliser and pesticides, were suddenly left without ways to produce healthy crops or combat weeds and insects. Many fearing a loss decided not to cultivate crops at all, adding to the food shortages in Sri Lanka.

The government made a dramatic U-turn in late October and farmers are now struggling to cover the high costs of imported fertiliser without help.

“The costs of cultivating paddy [rice] have gone up astronomically … The government has no money for fertiliser subsidies. Many of us farmers are reluctant to invest money because we don’t know if we will make any profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. ,” said one farmer, Ranjit Hulugalle.

In an attempt temporarily to ease the problems and stave off difficult and most likely unpopular policies, the government has resorted to temporary relief measures, such as credit lines to import foods, medicines and fuel from its neighbouring ally India, as well as currency swaps from India, China and Bangladesh and loans to purchase petroleum from Oman. However, these loans provide only short-term relief and have to be paid back quickly at high-interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
, adding to Sri Lanka’s debt load.

Anushka Shanuka, a personal trainer, was among those who used to have a comfortable life but now is struggling to get by. “We can’t live the way we used to before the pandemic,” he said, saying the prices of vegetables had gone up by more than 50%.

“The government promised to help us but nothing came, so we are just managing the best we can. I don’t know how much longer we can go on like this.”




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