EXPLANATORY NOTE: Why the Sri Lankan economy has collapsed and what will happen next

COLOMBO, the Prime Minister of Sri Lanka-Sri Lanka, says the island’s economy has “collapsed” because money has run out to pay for food and fuel. Due to the lack of money to pay for the necessary imports and already misused on its debt, it asked the help of neighboring India and China and the International Monetary Fund.

Prime Minister Ranil Wickemesinghe, who took office in May, highlighted the enormous challenge he faces in transforming the economy, which he says focuses on the “rock bottom.”

Sri Lankans skip food because they suffer from shortages, and they stand for hours trying to buy cheap fuel. This is a grim reality for a country whose economy is growing rapidly, with a growing and comfortable middle class, until the latest crisis deepens.

Tropical Sri Lanka normally does not have a shortage of food, but people are hungry. The UN World Food Program reports that almost nine out of 10 families missed or otherwise missed food, while 3 million received humanitarian aid.

Doctors turned to social media to try to obtain critical supplies of equipment and drugs. More and more Sri Lankans are looking for passports abroad for work. Government employees were given an extra day off for three months to give them time to grow their own food. People simply suffer and desperately want to improve.

WHY IS THE ECONOMY IN THESE STREETS?

Economists say the crisis stems from domestic factors such as years of mismanagement and corruption, but also from other problems such as rising debt of $ 51 billion, the impact of pandemics and terrorist attacks. in tourism and other issues.

Much of the public anger has been directed at President Gotabayu Rajapaksu and his brother, former Prime Minister Mahinda Rajapaksu. It intensified after weeks of protests against the government, which eventually became violent.

Conditions have deteriorated in recent years. In 2019, Easter suicide bombers killed more than 260 people in churches and hotels at Easter. This destroys tourism, a factor that originated in foreign currency. The government has had to increase its revenues as foreign debt for large infrastructure projects has risen, but Rajapaksa has instead pushed through the largest tax cut in Sri Lanka’s history, which was recently canceled. Leniers lowered Sri Lanka’s rating and prevented it from borrowing more money than its foreign reserves declined. Then tourism declines again during the pandemic.

In April 2021, Rajapaksa abruptly banned the import of chemical fertilizers. The pressure on organic farming caught farmers and destroyed basic rice, causing prices to rise. In order to save on foreign exchange, the import of other items that are considered a luxury is also prohibited. The war in Ukraine, meanwhile, has driven up food and oil prices. Inflation was close to 40% in May and food prices rose by almost 60%.

Why did the prime minister say that the economy is falling?

Such a strong statement could destroy any confidence in the state of the economy and does not reflect any specific new developments. Wickemesinghe seems to have called on his government to change things as it sought the IMF’s help and was criticized for not making enough progress since taking office weeks ago. He also suppressed criticism from within the country. His remarks could be meant to try to gain more time and support as he tries to get the economy back on track. The Treasury Department says Sri Lanka has $ 25 million in foreign exchange reserves. So they no longer pay for imports, especially to pay off billions in debt.

While the value of the Sri Lankan rupee has depreciated by almost 80% to about $ 360 to $ 1. As a result, import costs are even higher. Sri Lanka has suspended payments on foreign loans of about $ 7 billion to be repaid this year, from $ 25 billion in 2026.

WHAT IS THE GOVERNMENT DOING ABOUT IT?

Wickremesinghe has ample experience. This latest is his sixth term as prime minister.

So far, Sri Lanka has been muddling through, mainly supported by $4 billion in credit lines from neighboring India. An Indian delegation was in the capital Colombo on Thursday for talks on more assistance, but Wickremesinghe warned against expecting India to keep Sri Lanka afloat for long.

“Sri Lanka pins last hopes on IMF,” said Thursday’s headline in the Colombo Times newspaper. The government is in negotiations with the IMF on a bailout plan. Wickremesinghe said Wednesday he expects to have a preliminary agreement with the IMF by late July.

The government also is seeking more help from China. Other governments like the U.S., Japan and Australia have provided a few hundred million dollars in extra support.

Earlier this month, the United Nations began a worldwide public appeal for assistance. So far, projected funding barely scratches the surface of the $6 billion the country needs to stay afloat over the next six months.

To counter Sri Lanka’s fuel shortage, Wickremesinghe told The Associated Press in a recent interview that he would consider buying more steeply discounted oil from Russia to help tide the country through its crisis.

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Kurtenbach, the AP’s Asia business editor, contributed from Bangkok.