India’s neighbour Sri Lanka, similar to Pakistan, is falling into a deeper economic crisis as the international bailout package from the International Monetary Fund (IMF) hangs in limbo. Sri Lanka’s economy shrank 7.8 per cent in 2022 from a year ago, according to government data. The country is reeling under its worst financial crisis in more than seven decades. Sri Lanka’s fourth quarter GDP also contracted 12.4 per cent, according to data released by the statistics department. The country’s last quarter borrowing costs were at a two-decade high.
In the current situation, the island nation is hanging by a thread tied to the IMF. It expects a final approval from the IMF for a $2.9 billion loan in the third or fourth week of this month, as stated by President Ranil Wickremesinghe earlier this month. The confidence comes from China’s agreement to restructure its loans to Sri Lanka which means that all funding requirements had been met. “As a result of this step and financing assurances from India and the Paris Club, we expect approval for the program either in the third or fourth week of March,” the president said, as quoted by Reuters.
China and India are Sri Lanka’s biggest lenders. The island nation owed $ 2.83 billion to the Export-Import Bank of China, which is 3.5 per cent of Sri Lanka’s external debt, IMF data confirmed. Wickremesinghe had told Parliament that while the economy was showing signs of improvement, there was still insufficient foreign currency for all imports. This makes the IMF funding more crucial.
Sri Lanka on the brink
Sri Lanka’s economy contracted for four straight quarters with the required funds remaining elusive through last year. Through much of 2022, the country grappled with high costs, depleted funds and supply shortages while continuing to pursue IMF for funds, after its first ever debt default. Sri Lanka, in May, defaulted on a massive debt of over $ 56 billion it owes to foreign creditors, according to the World Bank. As preventive measures, Sri Lanka, while waiting for the relief fund, raised interest rates to the maximum since 2001.
According to CEIC, Sri Lanka’s Foreign Exchange Reserves was measured at $ 2.2 billion in February 2023 as against $ 2.1 billion in the previous month, which equaled only 1.5 months of imports. Sri Lanka’s foreign exchange reserves reached an all time high of $ 9.0 billion in April 2018 and a record low $ 38.0 million in April 1970. Not only this, the nation’s household debt reached 10.2 per cent in March 2022, accounting for 10.2 per cent of the country’s nominal GDP.
Earlier this week, reports came in from Sri Lanka that public employees at the country’s ports, hospitals, schools, and railways went on strike to protest against high costs of living. Members belonging to more than 40 trade unions refused to report to work or even took sick leaves. They are demanding the government roll back high taxes, lower interest rates and reduce power tariffs, Reuters reported.
What does the future look like for Sri Lanka?
According to a Bloomberg report, experts opine that demand will stabilise by the second half of 2023, provided IMF funds come in. “Dollar inflows, a stable currency and an end to power cuts will help manufacturing activity going forward,” Sanjeewa Fernando, senior vice president of research at Asia Securities Pvt Ltd, told Bloomberg. “We expect sequential growth to pick up in the current quarter amid easing supply-side issues and a recovery in tourism, and forecast the economy to grow by 2 per cent this year,” according to Ankur Shukla, South Asia Economist, Bloomberg.