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Financial And Humanitarian Crisis In Sri Lanka Risks Bankruptcy In 2022

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Half a million people have sunk into poverty since the pandemic struck, with rising costs forcing many to cut back on food. Inflation hit a record high of 11.1% in November and escalating prices have left those who were previously well off struggling to feed their families, while basic goods are now unaffordable for many. The country needs to repay an estimated $7.3 billion in domestic and foreign loans in the next 12 months

Sri Lanka is facing a deepening financial and humanitarian crisis with fears it could go bankrupt in 2022 as inflation rises to record levels, food prices rocket and its coffers run dry. One of the most pressing problems for Sri Lanka is its huge foreign debt burden, in particular to China. It owes China more than $5bn in debt and last year took an additional $1bn loan from Beijing to help with its acute financial crisis, which is being paid in instalments.

The World Bank estimates 500,000 people have fallen below the poverty line since the beginning of the pandemic, the equivalent of five years’ progress in fighting poverty. After Rajapaksa declared Sri Lanka to be in an economic emergency, the military was given power to ensure essential items, including rice and sugar, were sold at set government prices – but it has done little to ease people’s woes.

A chauffeur in the capital, Colombo, took on a second job to pay for rising food costs and cover the loan on his car but it was not enough. “It is very difficult for me to repay the loan. When I have to pay electricity and water bills and spend on food, there is no money left,” he said, adding that his family now eats two meals a day instead of three.

He described how his village grocer was opening 1kg packets of milk powder and dividing it into packs of 100g because his customers could not afford the whole packet. “We now buy 100g of beans when we used to buy 1kg for the week. “

The loss of jobs and vital foreign revenue from tourism, which usually contributes more than 10% of GDP, has been substantial, with more than 200,000 people losing their livelihoods in the travel and tourism sectors, according to the World Travel and Tourism Council.

The situation has got so bad that long queues have formed at the passport office as one in four Sri Lankans, mostly the young and educated, say they want to leave the country. For older citizens, it is reminiscent of the early 1970s when import controls and low production at home caused severe shortages of basic commodities and caused long queues for bread, milk and rice.

The former central bank deputy governor WA Wijewardena warned the struggles of ordinary people would exacerbate the financial crisis, which would in turn make life harder for them. “When the economic crisis deepens beyond redemption, it is inevitable that the country will have a financial crisis too,” he said. “Both will reduce food security by lowering production and failing to import due to foreign exchange scarcities. At that point, it will be a humanitarian crisis.”

In the next 12 months, in the government and private sector, Sri Lanka will be required to repay an estimated $7.3bn in domestic and foreign loans, including a $500m international sovereign bond repayment in January. However, as of November, available foreign currency reserves were just $1.6bn.

Central Bank Governor Ajith Nivard Cabraal made public assurances that Sri Lanka could pay off its debts “seamlessly” but Wijewardena said the country was at substantial risk of defaulting on its repayments, which would have catastrophic economic consequences.

In an attempt temporarily to ease the problems and stave off difficult and most likely unpopular policies, the government has resorted to temporary relief measures, such as credit lines to import foods, medicines and fuel from its neighbouring ally India, as well as currency swaps from India, China and Bangladesh and loans to purchase petroleum from Oman. However, these loans provide only short-term relief and have to be paid back quickly at high interest rates, adding to Sri Lanka’s debt load.

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