Suspended classes, postponed operations and little food: a country in the drama

When a country is forced to suspend school exams and postpone surgeries in hospitals due to a shortage of imported products, the drama is evident. We should also add that there is a lack of everything on the supermarket shelves and that motorists have to wait in long queues to get gas and the image that emerges is that of an economy on the edge of the ‘collapse. welcome to Sri Lanka, an Indian Ocean island with a GDP per capita of just over $4,000. Certainly low, but not that much compared to dozens of other emerging economies in the world.

What happened to Sri Lanka? With the pandemic, it has seen the main source of foreign currency inflow dry up: the tourism. It represented 12% of GDP, in fact less than in Italy. Except that the Sinhalese trade balance literally collapsed with the disappearance of foreign tourists. In January, the trade deficit nearly doubled to $1.085 billion. At this rate, it would explode to 15% of GDP for the whole year. Worse still, Colombo has little foreign exchange reserves. Last November, they amounted to just $3.1 billion, or less than 4% of GDP. In February, they were still down to just 2.3 billion. And this year alone, payments to foreign countries of 4 billion are expected.

Sri Lankan debt close to default

The situation has gotten so bad that the government has asked neighboring India for help, securing $2.9 billion in credit lines and currency swaps so far this year. Another 1.5 billion has been requested in recent days. In an effort to slow the rate at which reserves are declining, the central bank in March devalued the exchange rate by 40%. For consumers, this is bad news, as the price spike will intensify. On foodstuffs they already gallop at a rate of 25%. In the meantime, the government has also ordered the import blockingfocusing on essential products.

And this is how we find very few of them in shops and at very expensive prices.

Faced with such a desperate situation, it seems insignificant that the public debt has climbed in 2021 to 119% of GDP and that the rating agencies judge it on the verge of fault: CCC for S&P, CC for Fitch and Caa2 for Moody’s. Colombo has also requested China’s help in renegotiating bilateral loans. The support of the International Monetary Fund would be essential, which never comes in the absence of reforms. And Prime Minister Mahinda Rajapaksa had the happy idea of ​​halving the VAT from the previous deficit of 15%, a fact which contributed to wreaking havoc on public finances. The deficit in 2021 was 11.1%. A matter of time and we will know if Sri Lanka will default. Otherwise it should only be India and maybe China as well. New Delhi, in particular, appears to be the big winner from this crisis, having strengthened its grip on the island.

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