Ticking fiscal time bomb . . .
Despite having lifted its nationwide COVID-19 lockdown on October 1, Sri Lanka’s economic crisis continues unabated. To make up for a budget deficit of around 14 per cent of GDP in 2020, the Central Bank has increased the money supply by 42 per cent since December 2019, printing nearly C$800 million in currency this October alone. Net economic growth over 2020 and 2021, on the other hand, is projected only to be about one per cent, leading to fears of runaway inflation. The country is also at an extremely high risk of default on foreign-denominated debt in the next 10 months. Most analysts blame two factors for the crisis: The COVID-19 pandemic has gutted over C$10.7 billion in revenue, around half of which would have come from tourism; and, sweeping tax cuts enacted in 2019, fulfilling election pledges made by the current president, also set the stage for the revenue shortfall.
Fertilizers, food, and fuel . . .
The economic crisis has taken its toll in terms of food shortages and fuel prices. On September 1, the government declared a state of emergency to seize food stocks and regulate food prices in response to food shortages caused by the rise in global commodity prices and lack of foreign reserves. In early October, the government lifted price ceilings on basic foods such as rice and flour, which led to dramatic price increases. Further compounding the crisis is the government’s sudden ban on synthetic fertilizers earlier this year, part of a plan to convert the country’s agriculture sector to a fully organic one. This drastic change is expected to severely impact harvests and has already led to farmers protesting the lack of time to adjust. Finally, the country’s foreign currency crunch is also frustrating the import of crude oil, and the country will run out of gas and diesel by January if nothing changes.
New budget, old debates . . .
All eyes are now on the presentation of the 2022 budget later this month. The government has signalled that the budget will be “non-traditional” and will aim to cut the deficit at a “significant level” by reducing spending. But some economists say this is not enough and are pushing for the country to negotiate a loan from the International Monetary Fund (IMF). The debate about whether to accept IMF intervention is ongoing, with the government unwilling to accept further austerity constraints and loss of fiscal autonomy on top of previous IMF-backed restructuring. Beyond the IMF, Sri Lanka also walks a fine line between two major foreign creditors, China and India. The two countries’ spats with Sri Lanka over previous financing deals, quality of imported fertilizer, and fishing could make them less willing to lend further or impose steeper conditions for future loans.
- Daily Mirror: Sri Lanka faces looming crude oil crisis
- The Economist: A rush to farm organically has plunged Sri Lanka’s economy into crisis
- Nikkei Asia: Sri Lanka's economy seen as a 'ticking time bomb'