Devjyot ghoshal

NEW DELHI (Reuters – Anger over President Gotabaya Rajapaksa’s handling of a deeper economic crisis in Sri Lanka, a nation of 22million people, spiralled into violence on Thursday. Hundreds clashed with officers for many hours.

Rajapaksa has suffered severe currency shortages that have left it unable pay essential imports like fuel. The result was debilitating power cut lasting as long as 13 hours.

The ordinary Sri Lankans also have to deal with inflation and shortages after Sri Lanka devalued its currency sharply last month in anticipation of negotiations with the International Monetary Fund, (IMF), for a loan programme.

SRI LANKA – HOW DID SHE GET HERE

Critics believe the origins of the current crisis are economic mistakes made by successive governments. These were responsible for creating and maintaining a twin deficit (a shortfall in the budget along with a current account deficit).

According to a 2019 Asian Development Bank Working Paper, Sri Lanka has a “classic twin deficits economy.” Twin deficits indicate that a country has a higher national debt than its income and its output of tradable products and services are inadequate.

The current crisis was made worse by tax cuts Rajapaksa, who promised deep tax cuts during an election campaign in 2019, which were passed months before the COVID-19 outbreak that devastated parts of Sri Lanka’s economies.

Credit rating agencies downgraded Sri Lanka, effectively locking it out of the international capital markets.

The result was that Sri Lanka’s debt management program, which relied on these markets, became ill-fated and its foreign currency reserves plunged by nearly 70% within two years.

Rajapaksa’s 2021 ban on chemical fertilizers, which was later reversed by the government, had a devastating impact on the country’s agricultural sector, and caused a decline in critical rice crops.

SRI LANKA’S FOREIGN LOAN: WHAT HAPPENS?

In February the country left behind $2.31 billion, but it faces debt repayments in excess of $4 billion by 2022. There is also a $1 Billion international sovereign bond (ISB), due in July.

The largest portion of Sri Lanka’s international debt is held by ISBs, which amount to $12.55 Billion. Other major lenders include the Asian Development Bank and Japan.

IMF published a month-end review of the nation’s economy and found that its public debt was at “unsustainable levels”. It also stated that there were not enough foreign reserves to cover short-term debt payments.

Citi Research, in a late-last month note, stated that both the IMF’s conclusions and recent government measures weren’t sufficient to bring about debt sustainability. This strongly indicates “the necessity for debt restructuring”.

Who IS HELPING SRI LANKA

Rajapaksa’s government and the Central Bank of Sri Lanka were resisting calls from experts and leaders of the opposition to get help from IMF for months despite increasing risks.

However, after the Russian invasion of Ukraine in February caused oil prices to soar, the government came up with a plan that would allow it to approach IMF representatives in April.

A spokesperson for the IMF said that discussions will begin with Sri Lankan officials about a loan program.

Sri Lanka devalued their currency steeply before it went to the IMF. This inflamed inflation further and caused pain for the people, who are often facing hardships and waiting long lines.

Rajapaksa also reached out to India and China for assistance, especially on the fuel front. On Saturday, a diesel shipment that was under the $500 million credit agreement with India in February will arrive.

Sri Lanka and India signed $1 billion credit lines for imports of essentials including medicine and food. The Rajapaksa government sought an additional $1 billion from New Delhi.

China may offer the Chinese island country a $1.5B swap facility, as well as a $1.3B syndicated loan.