Jorgelina do Rosario and Swati Bahat

(Reuters) – Once-boggling Sri Lanka has run out of fuel, medicine, and foreign currency reserves. Even worse, the economic measures required to rescue the economy from the unprecedented crisis will likely cause more problems.

Economists agreed that Ranil Wickremesinghe’s dire assessment of the economic woes of the island country this week was an important first step. To restore some stability, he proposed selling the nation’s loss-making airline and printing more money. He also suggested raising taxes and increasing energy prices.

Wickremesinghe stated that the most concerning facts for the country were a 13% fiscal deficit (GDP), virtually zero foreign reserves, and a shortage of fuel, oil, and furnace oil.

Rating agencies expect to default on the country’s sovereign debt, and have suspended payments.

A chronic shortage of foreign currency has also led to inflation and thousands have marched against the government in the Indian Ocean country, where India and China vie for power.

On Wednesday, there was no gasoline at any of the service stations in Colombo (the commercial capital). The city’s most beloved mode of transportation, auto-rickshaws were waiting in long lines to be delivered.

Kanchana Wijesekera, the Power and Energy Minister of Sri Lanka, told Parliament that Sri Lanka does not have enough dollars to purchase petrol shipment. He appealed to citizens to quit waiting for two days.

Economists agree that most of Prime Minister’s suggestions are sensible.

Patrick Curran (senior economist, Tellimer in London) said that the printing of money was a concern and would increase fiscal and external imbalances.

His statement stated, “These policies are necessary to solve Sri Lanka’s economic crisis. However, it will cause substantial short-term suffering via increased inflation and currency depreciation. It will also require further rate rises by the CBSL (Central Bank of Sri Lanka), in order to control the pressure.”

S&P said printing money would have “significant inflationary implications”.

According to a Reuters poll, the central bank will hold a rate meeting Thursday. It is expected to increase rates for the fourth time in a row this year. Analysts believe it will increase the key lending rate by up to 2 percentage point this week.

SUBSIDIES, FERTILISER BAN

The combination of rising oil prices, the COVID-19 pandemic that battered the tourist-dependent economy and populist tax cuts made by President Gotabaya Rajapaksa (and his brother Mahinda), who both resigned last week as prime minister, created Sri Lanka’s current economic crisis.

Others include heavily subventioned domestic fuel prices and the ban on imports of chemical fertilizers, which have ravaged the agricultural sector.

According to World Bank data, Sri Lanka is a great example for emerging markets economies. It grew an average 6.2% per year between 2010-2016. This figure fell to 3.1% in the three following years.

While the World Bank projects that the economy will increase by 2.4% from 3.5% in 2020, they cautioned that it is still highly uncertain.

Charles Robertson in London was the global chief economist of Renaissance Capital. He stated that it was crucial to eliminate fuel price subsidies and electricity.

According to other economists, these reforms and others would be the foundation for talks with the International Monetary Fund about a vital bailout.

Robertson explained that there will be massive tax hikes. This would include a double-digit increase in VAT, possibly from 8% to at minimum 15% as we saw in 2019. It was the reduction in these VAT rates that contributed to the crisis.

Experts said that SriLankan Airlines’ sale is unlikely to bring in much cash given the current market. Nathalie Marshi, Head of Emerging Market Research at Stifel Financial Corp (NYSE:) Corp. said “It’s a great idea to sell it. But that’s a drop in their bucket vs the USD financing needs.”

At a time of deep crisis, the fear is that rising fuel prices and utility prices will increase public anger at the government. According to economists, the prime minister will need to convince citizens that such measures are needed to restore stability.

The April inflation rate was 29.8%, and food prices rose by 46.6% annually.

Trisha Peries, Frontier Research’s head of economic research in Colombo said, “Overall, I think it appears that corporations and individuals are preparing to take more tax steps.” “Further,” said Trisha Peries, head of economic research at Frontier Research in Colombo. She added that there is a lot of anticipation for future electricity tariff increases.

Wickremesinghe said Peries that Wickremesinghe had been “preparing the minds for the economic pain which is to follow”.