Asia - Pacific

As Sri Lanka waits for a bailout, economic hardships worsen for people

South Asian nation is facing worst financial crisis since its independence in 1948 due to massive balance of payment crisis

Dilrukshi Handunnetti   | 05.08.2022
As Sri Lanka waits for a bailout, economic hardships worsen for people

​​​​​​​COLOMBO, Sri Lanka

Piyadasa Fernando, 62, sells firewood by the roadside in the Sri Lankan southwestern town of Moratuwa. A taxi driver who is impacted by fuel shortages now feeds his family of four by collecting pieces of wood from nearby furniture shops and bundling them into firewood, with each bundle priced at a quarter a dollar.

“I can’t tell my kids that there is no work because there is no fuel. But I have to feed them. Protestors have managed to drive change in the political leadership, but I have yet to see any tangible result that makes our lives easier,” says Fernando.

Suman Senthilnathan, 56, is in the same predicament, he is a cancer patient currently unable to pay for his medication. To cope with the situation, his family reduced the number of meals served at home in order to pay for his treatment, but this is still insufficient.

There was scarcity at first, then the drugs became unaffordable, and now they are out of reach, according to Senthilnathan, who adds that it is impossible for him to envision a scenario with normalcy and fully restored supplies. "I'm on death row, and the economic collapse has made my time here even shorter," he lamented.

Unsurprisingly, Sri Lanka’s middle class is rapidly shrinking, while those living below the poverty line are on the rise. As a result of its economic woes, the island is now grappling with more issues such as loss of employment, job insecurity, child malnutrition, and disrupted education. To round out the picture, there are long queues for fuel, food, gas, and medicine. Sri Lanka's public health care and education systems, which have been hailed as the best in South Asia, are at grave risk.

The Indian Ocean island is facing its worst financial crisis since political independence in 1948 due to a massive balance of payment crisis, according to financial experts from the island’s Ministry of Finance.

“The debt has reached such proportions and the inability to service it has created a deadlock. Sri Lanka cannot borrow anymore. The government has to stop running and plan immediate economic reforms,” a top official from the ministry told Anadolu Agency, adding that reforms and an interim budget are in the offing.

Financial system collapsed

For months, Sri Lanka has been reeling from a severe economic meltdown caused by reckless borrowing, mismanagement, COVID-19, and a decline in tourism and tax revenue. By the end of July 2022, Sri Lanka's foreign exchange reserves were worth $1.9 million. In April, the country declared that it would default on $51 billion in external debts and requested a bailout from the International Monetary Fund (IMF).

The financial woes have triggered an unprecedented political crisis, resulting in massive public protests demanding essentials as the island nation came to a virtual standstill. Unable to service its debt, the Indian Ocean island declared bankruptcy in April, while the Ranil Wickremesinghe administration is locked in discussions with the IMF to reach a staff-level agreement.

The failure to respond to the impending financial crisis triggered a massive public outpouring with thousands of protestors eventually forcing the former prime minister to resign on May 9 and his brother Gotabaya to quit the presidency on July 12.

While the Rajapaksa administration crumbled like a pack of cards, the 22 million people continue to suffer.

President Ranil Wickremesinghe said in his policy statement to the Sri Lankan parliament on August 3 that the country needs to re-pivot the economy and implement broad reforms while maintaining import controls. He told the legislature that outdated policies should be abandoned in order to diversify the economy, increase exports, and reduce the island's reliance on foreign funding for economic development.

Reforms suggested

Umesh Moramudali is a lecturer at the University of Colombo and an economist. He believes Colombo must devise effective short-term revival strategies in order to face the future. "This includes an interim budget, tax laws (as part of a larger reform package), and a framework for debt sustainability."

“This will ensure that we can seek IMF support in the short-term. It is necessary to reach such an agreement as we currently lack foreign reserves. Following that, a general agreement with creditors, including our largest bilateral creditor China, should be reached. Putting these vital first steps together will be our expression of commitment to reaching a staff agreement, which could take up until the end of the year,” says Moramudali.

He emphasizes that Sri Lanka should simultaneously focus on the long-term, which should commence with tax reforms. Then, there should be a concerted effort to increase exports and explore more markets in order to increase foreign revenue.

“State-owned agencies such as the Ceylon Electricity Board (CEB) should undergo rapid reforms and the pricing formula should be increased,” he suggested, fearing that plans will fail if there is no business-friendly environment.

“Sri Lanka needs to streamline its processes to help the dollar inflows. It calls for new legal frameworks and a policy of not taking unnecessary loans and cutting back on huge public infrastructure spending while focusing on essentials like health, education, and social security," he added.

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