A number of analyses indicate that Sri Lanka is on the verge of a sovereign debt default as the country’s usable foreign currency reserves plunged below $1 billion. The coronavirus pandemic battered the island’s tourism sector — a key foreign exchange earner — sparking fears the country may not be able to repay its $51 billion foreign debt. Official data shows Sri Lanka needs nearly $7 billion to service its foreign debt this year, but the country’s foreign currency reserves at the end of February were only $2.02 billion — enough to finance less than one month’s imports.
On Wednesday, Sri Lanka tightened restrictions on a wide range of imports from whisky to kitchen appliances as a foreign exchange shortage pushed the economy to the brink of collapse.
An import ban was already introduced in March 2020 on big-ticket items such as cars in an effort by the government to stop the outflow of dollars needed to pay Sri Lanka’s debts. Under the new regulations, 350 items that the government considers luxuries, including apples, grapes and oranges cannot be freely imported. Chocolates, cheese and pasta will also not be allowed unless the government grants an exception. Essentials such as milk powder, sugar, lentils and wheat, as well as medications, are in short supply.
Sri Lanka is currently facing its worst economic crisis since the country gained independence in 1948. In spite of constant assurances by the governor of the Central Bank of Sri Lanka (CBSL), international rating agencies as well as economists have sounded the alarm about Sri Lanka’s ability to make its foreign debt repayments in 2022.
The measures came two days after the government devalued the local currency by nearly 15 percent against the US dollar in a desperate bid to attract more dollars through remittances.
Sri Lanka’s worst economic crisis since independence in 1948 has led to fuel and electricity rationing across the South Asian nation of 22 million, and has crippled public transport and caused long queues for food and medicines.
Since the government is adamant about not seeking IMF assistance, they looked at alternative avenues to deal with the economic crisis. Against this backdrop, the Sri Lankan government started to seek support from two global competing rivals: India and China. Sri Lanka has had strong economic ties with both these countries over the decades; economic relations with China in particular have gotten stronger during the last 20 years, with China emerging as the biggest bilateral lender and FDI provider to Sri Lanka. President Gotabaya Rajapaksa and many other top political leaders of the country requested economic support from both China and India to tackle the unprecedented economic crisis.
