The 81-billion- dollar Sri Lankan frugality is on the verge of collapse. The country is set to overpass on its debts now that it has to repay further than three times the amount it holds as foreign reserves. From debt trap to inflation, numerous effects contributed to the ongoing extremity.
The rise in total debt, along with their interest rates together forced the central bank to push policy rates to check inflation. Still, the currency tumbled against the dollar and the central bank drained foreign reserves to hold the exchange rate in place. Still, these factors boomeranged and pushed the Sri Lankan frugality into a vicious cycle.
Reasons for Crisis
- Debt Trap
Sri Lanka has foreign-currency reserves of around USD two billion, while the total debt prepayment target in the time 2022 is USD seven billion. External debt in Sri Lanka has been on a steep rise since 2005.
From USD11.3 billion in 2005, it rose to USD21.7 billion in 2010, USD43.9 billion in 2015, and USD56.3 billion in 2020 during the Covid epidemic. China reckoned for ten per cent of the loans while India constituted two per cent as of April 2021.
- Weak Currency
On the other side, the Sri Lankan Rupee downgraded by further than 50 per cent against the USD this time alone. This means that Sri Lanka now has to shell out nearly Rs. 310 to buy a dollar now, compared to Rs. 200 in January.
The Sri Lankan Rupee has downgraded against the Indian Rupee by31.6 per cent, the Euro by31.5 per cent, the pound sterling by31.1 per cent, and the Japanese Yen by28.7 per cent by end of March 31, according to the Central Bank of Sri Lanka.
- Rising Prices
Following the profitable turbulence and a massive kick against the unforeseen hike in the prices especially food items, Cabinet ministers and the Central bank’s governor have quit their posts in Sri Lanka.
The retail price of rice in the last week was 60 per cent further than the time-ago position, while the price of onions was 79 per cent, that of potatoes 66 per cent, and that of an egg was 93 per cent advanced time-on- time.
IMPACT ON GOVERNMENT
Altogether, Inflation rise upto18.7 per cent in March 2022 from15.1 per cent in February 2022. Food affectation stood at30.2 per cent in March, according to the Central Bank of Sri Lanka.
The Rajapaksa government’s decision to ban all chemical fertilisers in 2021, a move that was latterly reversed, also hit the country’s farm sector and started a drop in the critical rice crop.
IMF helping Sri Lanka in Crisis
For months, Rajapaksa’s administration and the Central Bank of Sri Lanka (CBSL) opposed calls by experts and opposition leaders to seek help from the IMF despite rising risks & threats. But after Oil prices soared in the wake of Russia’s invasion on Ukraine in late February, the government ultimately drew up a plan to approach the IMF in April.
