Sri Lanka is facing a financial crisis that could lead it to bankruptcy in 2022 as Inflation hit a record high of 11.1 per cent in November and people now struggling to feed their families.
The financial crisis in Sri Lanka is primarily caused by a low growth rate, currently at four per cent and huge debt service repayment obligations and the situation is worsening.
Earlier, on August 30 last year, the Sri Lanka government announced a national financial emergency after a steep fall in the value of the country’s currency which caused a spike in food prices.
About Debt
Since 2014, the foreign debt level of Sri Lanka has been on the rise and reached 42.6 per cent of GDP in 2019.
According to Colombo Gazette, that the cumulative foreign debt of the country was estimated at USD 33 billion in 2019, which puts a huge burden on the country for debt servicing.
After this, several credit rating agencies including Standard and Poor’s, Moody’s and Fitch downgraded Sri Lanka’s credit rating to B from C, which makes it difficult to obtain funds through International Sovereign Bonds (ISBs)
China- The largest Creditor
One of the most pressing problems for Sri Lanka is its huge foreign debt and debt service burden, in particular to China.
It owes China more than USD 5 billion in debt and last year took an additional USD 1 billion loan from Beijing to wean off its acute financial crisis, which is being paid in installments.
Sri Lanka’s President Gotabaya Rajapaksa made the request during a meeting with Chinese foreign minister Wang Yi to restructure its debt.
Foreign Reserves
It is estimated that the foreign currency reserves of the country would completely deplete by January 2022 and it would need to borrow at least -USD 437 million for necessary payments.
As of November 2021, available foreign currency reserves were just USD 1.6 billion while in the next 12 months, the government and private sector of Sri Lanka will have to repay an estimated USD 7.3 billion in domestic and foreign loans, including a USD 500 million international sovereign bond repayment in January 2022.
Current Situation
Sri Lankan government also plans to settle its past oil debts with Iran by paying them with tea, sending them USD 5 million worth of tea every month in order to save “much-needed currency”.
Moreover, Colombo has decided to close three overseas diplomatic missions from December 2021 to cut down expenditure.
The military of Sri Lanka was also given the power to ensure essential items, including rice and sugar, that was sold at set government prices.
The World Bank estimates 500,000 people have fallen below the poverty line since the beginning of the pandemic.
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