Anger against Sri Lankan President Gotabaya Rajapaksa’s handling of a deepening economic crisis in the island nation of 22 million people spiraled into violence late on Thursday, as hundreds of protesters clashed with police for several hours. A severe shortage of foreign currency has left Rajapaksa’s government unable to pay for essential imports, including fuel, leading to debilitating power cuts lasting up to 13 hours. Ordinary Sri Lankan are also dealing with shortages and soaring inflation, after the country steeply devalued its currency last month ahead of talks with the International Monetary Fund (IMF) for a loan program's As of February, the country was left with only $2.31 billion in its reserves but faces debt repayments of around $4 billion in 2022, including a $1 billion international sovereign bond (ISB) maturing in July. ISB make up the largest share of Sri Lanka’s foreign debt at $12.55 billion, with the Asian Development Bank, Japan and China among the other major lenders.
In a review of the country’s economy released last month, the IMF said that public debt had risen to “unsustainable levels” and foreign exchange reserves were insufficient for near-term debt payments.
In a note late last month, Cit Research said that the IMF report’s conclusion and the government’s recent measures were insufficient to restore debt sustainability, strongly indicating the need for debt restructuring.
Critics say the roots of the crisis, the worst in several decades, lie in economic mismanagement by successive governments that created and sustained a twin deficit – a budget shortfall alongside a current account deficit. Sri Lankan is a classic twin deficit's economy, said a 2019 Asian Development Bank working paper. Twin deficits signal that a country’s national expenditure exceeds its national income, and that its production of tradable goods and services is inadequate.
But the current crisis was accelerated by deep tax cuts promised by Rajapaksa during a 2019 election campaign that were enacted months before the COVID-19 pandemic, which wiped out parts of Sri Lanka’s economy. With the country’s lucrative tourism industry and foreign workers’ remittances sapped by the pandemic, credit ratings agencies moved to downgrade Sri Lanka and effectively locked it out of international capital markets.
In turn, Sri Lanka’s debt management program, which depended on accessing those markets, derailed and foreign exchange reserves plummeted by almost 70 per cent in two years. The Rajapaksa government’s decision to ban all chemical fertilizers in 2021, a move that was later reversed, also hit the country’s farm sector and triggered a drop in the critical rice crop. As of February, the country was left with only $2.31 billion in its reserves but faces debt repayments of around $4 billion in 2022, including a $1 billion international sovereign bond (ISB) maturing in July. ISB make up the largest share of Sri Lanka’s foreign debt at $12.55 billion, with the Asian Development Bank, Japan and China among the other major lenders.
In a review of the country’s economy released last month, the IMF said that public debt had risen to “unsustainable levels” and foreign exchange reserves were insufficient for near-term debt payments.
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