Sri Lanka declares food emergency as forex crisis worsens

Tue, 31 August 2021, 5:53 am·2-min read

Shortages of goods including kerosene oil, milk and cooking gas have led to long queues forming outside stores in Sri Lanka (AFP/ISHARA S. KODIKARA)

Sri Lanka on Tuesday declared a state of emergency over food shortages as private banks ran out of foreign exchange to finance imports.

With the country suffering a hard-hitting economic crisis, President Gotabaya Rajapaksa said he ordered emergency regulations to counter the hoarding of sugar, rice and other essential foods.

Rajapaksa has named a top army officer as “Commissioner General of Essential Services to coordinate the supply of paddy, rice, sugar and other consumer goods”.

The move followed sharp price rises for sugar, rice, onions and potatoes, while long queues have formed outside stores because of shortages of milk powder, kerosene oil and cooking gas.

The government has increased penalties for food hoarding, but the shortages come as the country of 21 million battles a fierce coronavirus wave that is claiming more than 200 lives a day.

The economy shrank by a record 3.6 percent in 2020 because of the pandemic and in March last year the government banned imports of vehicles and other items, including edible oils and turmeric, an essential spice in local cooking, in a bid to save foreign exchange.

Importers still say they have been unable to source dollars to pay for the food and medicines they are allowed to buy.

Two weeks ago, the Central Bank of Sri Lanka increased interest rates in a bid to shore up the local currency.

Sri Lanka’s foreign reserves fell to $2.8 billion at the end of July, from $7.5 billion in November 2019 when the government took office and the rupee has lost more than 20 percent of its value against the US dollar in that time, according to bank data.

Energy minister Udaya Gammanpila has appealed to motorists to use fuel sparingly so that the country can use its foreign exchange to buy essential medicines and vaccines.

A presidential aide has warned that fuel rationing may be introduced by the end of the year unless consumption was reduced.

Sri Lanka has fallen into China’s debt trap. They have to fork out almost 2 billion dollars repayments to Chinese loans before 2022.

Waaow, and some people say that Debt-trap diplomacy from China is not real.
Is Djibouti going the same route?

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Djibouti, Ethiopia & Kenya all indebted heavily to China.

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Sri Lanka’s foreign debt default: Why the island nation went under

A few years ago, Sri Lanka had a booming tourism industry and promising infrastructure projects that made global headlines. Now the country is broke. What went wrong?

Auto rickshaw drivers queue up to buy petrol near a station in Colombo, Sri Lanka

Experts say Sri Lanka’s economic momentum has been curtailed by a series of poor policy decisions

Sri Lanka, the island nation in the Indian Ocean with a population of nearly 22 million, has plunged into a deep economic crisis. With more than $50 billion (€46 billion) in external debt and a shortage of foreign exchange reserves, the country is currently struggling to pay for essential imports. This has led to sharp increases in the price of essential commodities like rice, fuel, and milk. A fuel shortage recently left much of the country suffering through a 13-hour power cut.

Sri Lanka’s foreign debt obligations for this year exceed $7 billion. But the country’s forex reserves as of March 2022 is just $1.6 billion. On Tuesday, the country announced a default on all its foreign debt. Now Sri Lanka is hoping for an IMF bailout to save it from the worsening crisis.

A few years ago, Sri Lanka seemed to be on the right track. Tourism was booming, with mega-infrastructure projects were making headlines worldwide. Today the country is insolvent and prices are skyrocketing.

Infographic depicting Sri Lanka's foreign debt broken doun by major lenders|-1x-1

A series of questionable decisions

A financial crisis had been brewing for more than a decade in Sri Lanka, where International Sovereign Bonds (ISB) — or market borrowing — constitute a major portion of the country’s foreign debt.

“Since graduating into a lower middle-income country in the early 2000s, successive Sri Lankan governments have been increasingly borrowing from private international capital markets through the issuance of sovereign bonds, seriously contributing to the precarity of the balance-of-payments of the country,” said Dr. Muttukrishna Sarvananthan, development economist and principal researcher at the Point Pedro Institute of Development in Sri Lanka. “This capital-market borrowing is unconditional, with relatively high interest rates and much shorter durations of repayment.”

ISBs account for nearly half of the country’s total outstanding external debt. A sharp decline in the market prices of these bonds followed Sri Lanka’s Tuesday’s announcement of a pre-emptive default on its foreign debt.

“The sovereign default was a necessary and inevitable evil to convince the IMF about the political stability amidst widespread and continuous public protests all over the island,” Sarvananthan said.

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Sri Lanka pins recovery hopes on tourism sector

Tax cuts gone wrong

Sri Lanka’s government recently offered unsolicited value-added and income tax cuts to taxpayers. This led to an extreme loss of government revenue. As a consequence, the Sri Lankan Rupee started to slip. Without the necessary cash reserves in place, in early March Sri Lanka had to allow the rupee to free fall .

In such a case, interest rates should also be increased, said Sarvananthan. This serves to stop the huge rise in overall inflation, which reached nearly 20% in April, and 30% for food.

The Central Bank of Sri Lanka did eventually hike interest rates by 7%. “However, severe damage has been already inflicted to the economy and it will take at least five years to recover from this mess,” said Sarvananthan.

A reduction in indirect consumption taxes such as the VAT could have been beneficial for ordinary people, he adds, but the rich and crony capitalists wanted reductions in corporate and personal income taxes. The COVID-19 crisis and the war in Ukraine are also pushing up global commodity prices.

“However, primarily the economic crisis is home-made and long-running and therefore Sri Lanka should own it instead of passing the buck,” said Sarvananthan.

The government made a slew of policy decisions which resulted in macroeconomic imbalances on all fronts and this exacerbated the economic crisis, says Dr. W.A Wijewardena, former deputy governor of the Central Bank of Sri Lanka. These mistakes range from the tax cuts to poorly thought out borrowing to selling forex reserves to prop up the exchange rate with the dollar to an overly ambitious shift to organic farming which caused a significant drop in agricultural output.

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Still a strategic partner

China holds a significant portion of Sri Lanka’s total foreign debt, nearly 10%, with more held by Japan, the World Bank and the Asian Development Bank. India holds nearly 3%.

Regional powers India and China have been competing with each other to gain a foothold in the strategic island nation. Sri Lanka is a critical link for China in their Belt and Road global infrastructure projects. For India, Sri Lanka is a geo-politically significant country.

“Sri Lanka had been a neutral nation between these two regional powers without taking a side,” said Wijewardena. “In the past, it had helped to receive economic benefits from both countries without offending either one. However, in the recent past, there has been competition between these two powers to help Sri Lanka and gain a foothold in the country over the other.”

These geopolitically driven motives are the main reason why the administration of current Sri Lankan president Gotabaya Rajapaksa has had the false idea that it could do without IMF’s help, he added.

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A band-aid for a bullet hole

With Sri Lanka down on its luck, both countries continue to play nice. In January, India agreed to defer an Asian Clearing Union payment of $515 million and extended an emergency trade credit of $500 million. In March, it extended another trade credit of $1 billion through the State Bank of India. Sources say that India is open to an additional $2 billion in aid for Sri Lanka.

“Sri Lanka has requested China for debt restructuring but China is yet to grant this request,” said Wijewardena. “Initially it had shown willingness to give another loan of $2.5 billion to enable Sri Lanka to refinance the maturing loans but it was withdrawn later. Instead China provided relief to Sri Lanka by providing a Yuan swap of 10 billion Yuan.”

This swap amounts to nearly $1.5 billion, giving a major boost Sri Lanka’s forex reserves.

But it’s still not enough to mitigate the crisis. Sri Lanka’s current strategy is to get relief through common debt restructuring with the support of IMF.

“It will provide a breathing space to Sri Lanka but not a permanent solution,” said Wijewardena. “A permanent solution lies in Sri Lanka gaining the capacity to honor its debt obligations by improving forex inflows through the development of the export of goods and services and by offering facilities for foreign direct investment to take place.”

Edited by: Kristie Pladson

Sri Lanka defaults on debt for first time in its history

Police fire a tear gas canister at protestors in Sri LankaIMAGE SOURCE,GETTY IMAGES

Sri Lanka has defaulted on its debt for the first time in its history as the country struggles with its worst financial crisis in more than 70 years.

It comes after a 30-day grace period to come up with $78m (£63m) of unpaid debt interest payments expired on Wednesday.

The governor of the South Asian nation’s central bank said the country was now in a “pre-emptive default”.

Later on Thursday, two of the world’s biggest credit rating agencies also said Sri Lanka had defaulted.

Defaults happen when governments are unable to meet some or all of their debt payments to creditors.

It can damage a country’s reputation with investors, making it harder to borrow the money it needs on international markets, which can further harm confidence in its currency and economy.

Asked on Thursday whether the country was now in default, central bank governor P Nandalal Weerasinghe said: "Our position is very clear, we said that until they come to the restructure [of our debts], we will not be able to pay. So that’s what you call pre-emptive default.

“There can be technical definitions… from their side they can consider it a default. Our position is very clear, until there is a debt restructure, we cannot repay,” he added.

Sri Lanka is seeking to restructure debts of more than $50bn it owes to foreign creditors, to make it more manageable to repay.

The country’s economy has been hit hard by the pandemic, rising energy prices, and populist tax cuts. A chronic shortage of foreign currency and soaring inflation had led to a severe shortage of medicines, fuel and other essentials.

In recent weeks, there have been large, sometimes violent, protests against President Gotabaya Rajapaksa and his family due to the growing crisis.

The country has already started talks with the International Monetary Fund (IMF) over a bailout and needs to renegotiate its debt agreements with creditors.

Later on Thursday, an IMF spokesman said the current set of talks on a potential loan programmeare expected to conclude on Tuesday.

Sri Lanka’sgovernment has said previously that it needs as much as $4bn this year.

Mr Weerasinghe also warned that Sri Lanka’s already very high rate of inflation was likely to rise further.

“Inflation obviously is around 30%. It will go even [higher], headline inflation will go around 40% in the next couple of months,” he said.

He was speaking after Sri Lanka’s central bank held its two key interest rates steady following a seven percentage points rise at its last meeting.

The country’s main lending rate remained at 14.5%, while the deposit rate was kept at 13.5%.

In many ways this wasn’t a surprise. The warning sirens of a potential default were already blaring a few weeks ago.

But much more than that, on the streets of Sri Lanka, where this crisis is biting, nobody is shocked.

As petrol queues run for miles, with fuel being sold on the black market for eye-watering amounts, as lines for handouts of free bread get longer by the day, the island’s inability to pay back debts is being painfully felt.

In his first interview since taking office last week, the country’s Prime Minister Ranil Wickremesinghe told me things would get worse before they improve in Sri Lanka, but even he wasn’t able to predict just how bad.

“No-one has got all the details… so I will be like a doctor who’s opening up the patient for the first time.”

Today’s default is a depressing diagnosis for a nation facing more economic turmoil, even as talks with the IMF and other nations continue.

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On Thursday, ratings agency Moody’s Investors Service said Sri Lanka had “defaulted on its international bonds for the first time”.

Moody’s said it expects the country to eventually reach an agreement over an IMF bailout.

“However, finalising the programme will likely take several months given the need for staff level agreement on both sides, followed by parliamentary approval in Sri Lanka and approval by the IMF’s executive board,” the firm added.

Also on Thursday, Fitch Ratings lowered its assessment of Sri Lanka to a “restricted default” after a grace period for payments had expired.

S&P Global Ratings did not immediately respond to a request for comment from the BBC.

Credit ratings are intended to help investors understand the level of risk they face when buying a financial instrument, in this case a country’s debt - or sovereign bond.

Last month, S&P and Fitch credit rating agencies warned Sri Lanka was about to default on its debts.

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PM Ranil Wickramasinghe: “There won’t be a hunger crisis”

Last week, President Rajapaksa’s elder brother Mahinda resigned as prime minister after government supporters clashed with protesters. Nine people died and more than 300 were wounded in the violence.

On Friday, Sri Lanka’s new Prime Minister Ranil Wickremesinghe told the BBC that the economic crisis was “going to get worse before it gets better”.

He also pledged to ensure families would get three meals a day.

Appealing to the world for more financial help, he said “there won’t be a hunger crisis, we will find food”.


Sri Lanka: The basics

  • Sri Lanka is an island nation off southern India: It won independence from British rule in 1948. Three ethnic groups - Sinhalese, Tamil and Muslim - make up 99% of the country’s 22m population.
  • One family of brothers has dominated for years: Mahinda Rajapaksa became a hero among the majority Sinhalese in 2009 when his government defeated Tamil separatist rebels after years of bitter and bloody civil war. His brother Gotabaya, who was defence secretary at the time, is now president.
  • Now an economic crisis has led to fury on the streets: Soaring inflation has meant some foods, medication and fuel are in short supply, there are rolling blackouts and ordinary people have taken to the streets in anger with many blaming the Rajapaksa family and their government for the situation.

Protesters take over Sri Lanka’s President’s Official residential palace.