Sri Lanka on the Edge of Economic Collapse

Relief package announced as tourism revenues plunge amid COVID restrictions . . .

This week, Sri Lankan President Gotabaya Rajapaksa announced a C$1.27-billion relief package to help alleviate the country’s long-simmering economic crisis. The crisis was set in motion partly by COVID-19-related tourism restrictions, which have cut deeply into the country’s foreign currency earnings and reserves. Since Rajapaksa took office in late 2019, foreign currency reserves have cratered from C$9.5 billion to just C$2 billion in November 2021. Colombo is on the hook for substantial foreign debt repayments, which some analysts say could leave it bankrupt within months.

Wrong remedy?

The relief package will increase compensation for civil servants, cut taxes on food and medical items, and provide income subsidies to the poor. But critics say it will neither resolve the country’s foreign currency issues, which have limited the import of food and other essential goods, nor address soaring inflation rates. The government’s own actions have exacerbated the crisis: High government spending; tax cuts (a Rajapaksa campaign pledge); and, hastily imposed agricultural policies, namely, its directive for farmers to transition away from chemical fertilizers, which has led to significant crop loss.

Desperate times, creative measures . . .

Sri Lanka is considering a bailout from the International Monetary Fund, although the government would likely bristle at the austerity measures such an arrangement would entail. Another option under discussion is bilateral assistance from China and/or India. In the meantime, it is taking some creative – and desperate – measures to respond to the foreign currency shortfalls. For example, Sri Lanka will begin sending C$6.4 million in tea to Iran each month to pay off the C$320 million owed for oil shipments and temporarily close three diplomatic missions (Cypress, Germany, and Nigeria). The government has also rolled out a plan to incentivize overseas Sri Lankans to send remittances through official rather than informal channels. Canada is one such source of remittances – in 2017 (the most recent year data are available), these remittances were estimated to be around C$57 million. However, this is also unlikely to be a sufficient remedy, as overall remittances to Sri Lanka have dropped 35 per cent since a year ago.