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inflation and debt burden worsen economic crisis


After Sri Lanka declared a state of emergency due to food shortages, people waited in line outside Colombo’s supermarket. Private banks had run out of foreign currency and were unable to import food. August 31, 2021

Ishara S. Kodikara | AFP | Getty Images

Zahara Zain believes that the times are currently in Sri Lanka. reminiscent of the early 1970s,The country was struggling to survive in the face of severe food shortages.

Zain from Colombo, an owner of a small food company said “It almost feels as if we’re reliving the 1970s,” Because of limited supplies, daily living has been difficult for many Sri Lankans.

Sri Lanka has been hit by rising debt and prices, with its citizens feeling the pinch as their domestic environment becomes increasingly difficult.

Mother of young children, the woman said milk was rationed along with sugar and rice. Her old milk power was 1kg, but shops now only allow 400g.

“How could that amount be sufficient? CNBC spoke to Zain about her children’s need for milk. She also said that the cost of milk for each kilogram has risen by nearly $1.

According to Zain, the shortage in U.S. Dollars has had a significant impact on prices for most foods and the raw materials required by her food business. “People are being affected by the situation.”

Sri Lanka’s economic problems have further complicated its situation increasingly difficult external debt crisisAccording to analysts.

Shahana Murkherjee from Moody’s Analytics, said that policymakers face “the double challenge of repaying overseas debts and meeting domestic requirements.”

Spiraling debt

Sri Lankan President Gotabaya Rajapaksa declared an economic emergencyIn September. The government was able to regulate the supply of food basics and fix prices to limit rising inflation. spiked to 14.2% in January.

Due to the pandemic, tourism spending in South Asia has declined. However, the economists pointed out that Sri Lanka’s debt was on an inexorable path long before this.

Dushni Sheerakoon is the executive director of the Institute of Policy Studies of Sri Lanka.

“Reserves were accrued by taking out foreign currency funds and not through the higher export earnings of goods, services, or other commodities. She said that Sri Lanka was thus highly vulnerable to external shocks.

Furthermore, foreign currency was used by the government to pay off the debt. The central bank also had foreign reserves being reduced to prop up the Sri Lankan rupeeCapital Economics’ Asia economist Alex Holmes said that the pressure was on.

Holmes explained that as a consequence, there is not enough foreign currency in the economy for imports of food. Holmes also said this.

Pandemic strikes tourism

Covid-19 was another setback for the tourism-dependent island economy, adding to its debt burden.

Murkherjee stated that the pandemic has caused significant strain to finances. Revenues from government have been under severe pressure since 2020, when important tourism revenue-generating sectors has been effectively put on hold. Migrant worker remittances also have suffered major losses.”

Pandemic-induced financial strain has been substantial, with excessive government revenue coming under pressure.

Shahana Murkherjee

Moody’s Analytics and Economist

It tax cuts According to analysts, 2019 was worse than 2018, as it resulted in a substantial drop in taxes revenue. This further weakened the government’s capacity to assist the economy in the Covid crisis.

Weerakoon stated that the pandemic disrupted capital flows as weaker fiscal and debt indicators made matters worse. “Sri Lanka’s sovereign ratings were downgraded which has limited access to capital market borrowing,” Sheerakoon added.

Relief is offered by India and China  

It’s a difficult balance act

Sri Lanka public debt is projected to have risen from 94% in 2019 to 119% of GDP in 2021. 

Holmes stated that for the government it is all about balancing both the negatives and positives of defaulting on debt. The cost of defaulting will likely be lower than that of paying. [keep]Going for Sri Lanka,” said he, and that it was better for policymakers “to bite the bullet”.

Analysts believe that the country should either consolidate its debt, or seek relief from the International Monetary Fund.

Citi analysts stated that they believed the Sri Lankan government would eventually have to submit to the IMF. However, it was possible for the IMF to default.

The government is balancing all the negatives and positives that can be attributed to defaulting on its debt.

Alex Holmes

Asia economist, Capital Economics

Mixed messages from the government about seeking out IMF funding have been heard. The article quoted Basil Rajapaksa, Finance Minister. Financial Times as saying that all options were being explored, including an IMF relief. 

However, the central bank Governor Ajith Cabraal told CNBCBecause Sri Lanka had an alternate strategy, it did not require IMF assistance. He stated that Sri Lanka can finance its debts, including international sovereign bonds, without causing pain to creditors in a late January interview.

Averting a deeper crisis

According to the central bank, Sri Lanka is committed to fulfilling all debt obligations. They also deny media reports which claimed the country was on the brink of a sovereign default, and said “such claims are totally unsubstantiated.”

Moody’s Mukherjee said that it is possible for policymakers to prioritise stabilizing domestic conditions in very short term. This could be done by diverting large amounts of foreign aid towards meeting growing domestic demands and avoiding a deeper economic crises.

The country’s debt crisis is a source of increasing anxiety and frustration for Sri Lankans.

Zain from Colombo, who is the owner of a small business said “People are anxious and there’s a lot anger directed at government.”. “The country is already in a hole, hopefully they don’t dig a bigger hole — and will just resolve the debt problem.”

Saheli Roy Chaudhury contributed to the report.