Sri Lanka's Economic Crisis: Inflation >40%

The Crisis

Sri Lanka has recently fell into default for the first time in history (since it’s independence in 1948) as the government is struggling to halt a full-scale economic meltdown. 22 Million people live in the Southeast Asian island nation officially known as the Democratic Socialist Republic of Sri Lanka.

The government recently missed a $78 million interest payment, even after the 30-day grace period. There is a $105 million payment to China that is also late and its grace period is approaching. They currently owe $25 billion to foreign creditors but cannot pay them. $7 billion is payable this year, and the rest, with interest, is due by 2026 under current terms.

They have recently announced that they are halting scheduled debt payments on a whole pile of foreign liabilities to preserve cash for essential goods like food and fuel. They currently have 5 days worth of fuel, and are waiting on a $500 million credit line for fuel from India. India has been a key supporter during this crisis, having poured in about $3B in assistance. The United Nations plans on pledging $48 million, which is will last Sri Lanka roughly 2 weeks according to their own estimates.

Announcing you’re not going to pay your debts usually doesn’t do wonders for your credit rating, or your cost of borrowing money. A year ago, Sri Lankan 10-year bonds were yielding 8.5%. Today they are at 21.3%. It’s getting harder and harder to borrow money for Sri Lanka, but they have few other options as they have spent through their reserves. At the end of 2019 they had $7.6B in reserves , declining to $5.7B by the end of 2020, $3.1B by the end of 2021 and $0.05B now, or $50 Million.

Besides India, Sri Lanka’s best option is the IMF. As of last week, Sri Lanka’s government is seeking $6 billion to keep the country afloat for the next six months. This was increased from the $5 billion the finance minister Mr. Wickremsinghe told parliament that he would be asking the IMF for:

$3.3 billion for fuel imports

$900 million for food

$600 million for Fertilizer

$250 million for cooking gas.

Inflation

Sri Lanka has recently experienced high inflation (33.8% officially for April), which is only increasing, —39.1% for May, and likely over 40% currently. Food prices in Colombo, it’s largest city, have raised by 57.4% in May.

The government has also increased their Value Added Tax (VAT) by 50%, from 8% to 12%. Their corporate taxes are also increasing from 24% to 30%.

The Rajapaksa Family

The Rajapaksa family has been a powerhouse in Sri Lanka for decades and they are being blamed for many of the policies that have led to this crisis. Mahinda Rajapaksa, the former Prime Minister, resigned last month, and his brother Basil just resigned yesterday.

A state-run power entity, the Ceylon (salon) Electricity Board (CEB) has been planning a strike soon that, if enacted, will create blackouts. They recently agreed with the president to temporarily call off the strike, but meanwhile the capitol has still been experiencing rolling blackouts.

How did it get this bad?

1. Fertilizer Ban

2. 2019 Terrorism and Covid reducing tourism

3. Poorly timed tax cuts

4. Unnecessary infrastructure projects

5. General corruption and mismanagement

Sources:

https://www.reuters.com/markets/commodities/fertiliser-ban-decimates-sri-lankan-crops-government-popularity-ebbs-2022-03-03/

https://www.business-standard.com/article/opinion/is-sri-lanka-the-next-argentina-122040401320_1.html

https://www.nytimes.com/2018/06/25/world/asia/china-sri-lanka-port.html