Sri Lanka Looks Outward as Economic Crisis Worsens

IMF makes Sri Lanka's untenable position clear . . . 

As its economic crisis deepens, Sri Lanka has increased interest rates, devalued its currency by unpegging the rupee from the U.S. dollar, and raised fuel prices. But these and other measures have failed to forestall the country’s ongoing foreign debt crisis. The International Monetary Fund (IMF) described it as a “clear solvency problem” in a report released last week, as the country endures unsustainable debt. Furthermore, the Russian invasion of Ukraine last month has exacerbated the foreign exchange crisis. With remaining foreign reserves at C$2.9 billion as of February and another C$5 billion in debt, including a C$1.25-billion bond that matures in July, President Gotabaya Rajapaksa has been searching for multilateral and bilateral aid, including from nearby countries.

Neighbours to the rescue?

India is among the few countries that Sri Lanka is turning to for economic relief, and it has provided a C$1.25-billion line of credit for essentials and C$630 million for fuel to address the country’s energy crisis. While China continues to consider Sri Lanka’s request for C$3.13 billion in economic assistance, the credit line could be perceived as a strategic win from the Indian perspective because it has been contending with China for influence in the country through heavy investment in power plants after China pulled out. At the recent Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation Summit, Indian External Affairs Minister S. Jaishankar recognized that India is not Sri Lanka’s top creditor but rather its closest neighbour – signalling friendship and co-operation as India pitched for stronger regional economic integration and security.

Brewing humanitarian crisis . . .

The worsening economic and energy crisis has disrupted daily life in Sri Lanka. Protesters have taken to the streets to demand that the president resign as poverty rates increase with soaring inflation and the growing inability to purchase essential items. Hospitals have been forced to suspend surgeries due to a shortage in medical supplies, which are being saved for emergency use. Despite President Rajapaksa’s claim that Sri Lanka would no longer suffer power cuts after March 5, the government has extended daily electricity outages to 13 hours starting Thursday, a three-hour extension to the previous 10 hours that began Tuesday. While businesses struggle to operate, trading sessions at the Colombo Stock Exchange have also been shortened, further hindering the economy. The effects of these shortages are far-reaching – and no end is in sight.