Monday, August 15, 2022

Sri Lanka in debt trap

After weeks of unrest culminating in mob arson and killings resulting in the deaths of at least five people including an MP and wounding almost 200 – ever since the anti-government protests in Sri Lanka- began in April, the island nation struggles to get back to normalcy from an economic crisis that began several weeks ago. The ruling dynast of president Mahinda Rajpaksa, his younger brother and prime minister Gotbaya Rajpaksa, were targeted as the enemies of the state. The fault with the Rajpaksas is that the two brothers had only precipitated the imminent economic catastrophe that awaited Sri Lanka. The nation’s tourism industry, the highest revenue earner took a hit after the Islamic terror bombing on hotels in 2019 and then followed by the curb on travel due to the coronavirus pandemic. Tourism revenues contributed to 5.6 per cent of the Sri Lankan GDP in 2018 but fell to just 0.8 per cent in 2020. To add to the woes, the Rajpaksas cut on VAT to 8 % , corporate tax from 28% to 24% and abolishment of Pay As You Earn(PAYE) tax and 2% nation building tax added to 33.5% decline in registered taxpayers. Again, in April 2021 Rajpaksa hit the most sensitive spot-agriculture when he announced a ban on import of chemical pesticides and fertilisers in favour of organic cultivation. In November 2021, the government abandoned the organic farming plan, but the damage was already done. This led Sri Lanka to import rice worth $450 million in 2021.The Sri Lankan crisis that spilled over to the streets almost took the form of a civil war. The Rajpaksas are gone but they have left their country in ruins and in dire straits. For many, Sri Lanka’s economic downslide has been blamed on China mainly since the Rajpaksas had been favouring the communist giant. Between 2000 and 2020, China extended close to $12 billion in loans to the Sri Lankan government, largely for a slate of major infrastructure projects that turned into white elephants- including a costly port facility in the Rajapaksas’ hometown of Hambantota, which was effectively ceded to Chinese control half a decade ago after Sri Lankan authorities recognized they could no longer pay off the loans. However figures reveal that the biggest debts are owed by Sri Lanka not to China alone but western firms. In May this year, Sri Lanka failed to make an interest payment on its foreign debt for the first time in its history. The country owes more than $51bn (£39bn) to foreign lenders, including $6.5bn to China, which has begun discussions about restructuring its loans. The next government will face insurmountable hurdles since the country doesn’t have enough fuel for essential services like buses, trains and medical vehicles, and doesn’t have enough foreign currency to import more. In late June, the government banned the sale of petrol and diesel for non-essential vehicles for two weeks. Sales of fuel remain severely restricted. Sri Lanka is unable to buy the goods it needs from abroad since it has no foreign exchange reserve balance. A change in government will not rescue Sri Lanka from its bankruptcy and the only hope is for the IMF to pump in millions to get it out of the ICU.Even if Sri Lanka comes out of the ICU, it will be another challenge to recovery.

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