Sri Lanka staring at twin deficits, may go bankrupt in 2022 as inflation rises: Report

Sri Lanka is facing a rising financial and humanitarian crisis that might push the country into bankruptcy by 2022 as inflation reaches new highs, according to a media report. The Sri Lankan government declared a national financial emergency on August 30 last year, following a sharp drop in the value of the country's currency, which resulted in rising food costs.

Suhail Guptil, writing in the Colombo Gazette, stated that Sri Lanka has been dealing with twin deficits, namely fiscal and trade deficits, for the better part of the last decade. Sri Lanka's foreign debt has been increasing since 2014, reaching 42.6% of GDP in 2019. According to Guptil, the country's total foreign debt was anticipated to be USD 33 billion in 2019, putting a severe load on the country's debt servicing.

Following this, various credit rating agencies, including Standard & Poor's, Moody's, and Fitch, reduced Sri Lanka's credit rating from C to B, making it difficult for the country to borrow financing through International Sovereign Bonds (ISBs), according to Guptil. Sri Lanka's financial crisis is primarily driven by a poor growth rate (now at 4%), as well as massive debt service repayment commitments, and the situation is deteriorating.

Sri Lanka has to repay estimated USD 7.3 billion in domestic and foreign loans

The government and private sector of Sri Lanka will have to repay an estimated USD 7.3 billion in domestic and foreign loans over the next 12 months, including a USD 500 million international sovereign bond repayment in January 2022, according to the report. Available foreign currency reserves were just USD 1.6 billion as of November 2021. It went on to say that one of Sri Lanka's most pressing issues is its massive foreign debt and debt payment burden, particularly with China. It owes China more than USD 5 billion in debt and received a USD 1 billion loan from Beijing last year to help it get through its severe financial crisis, which is being paid back in instalments.

By January 2022, the country's foreign currency reserves are expected to be depleted, and it would need to borrow at least -USD 437 million to make critical payments. According to the research, the country's main concern right now is how to manage USD 4.8 billion in foreign debt service due between February and October 2022. In November, inflation reached a new high of 11.1%, leaving people who were formerly well-off struggling to feed their families, while basic necessities have become unaffordable for many.

World Bank estimates, 500,000 individuals slipped into poverty

Following Gotabaya Rajapaksa's declaration of an economic emergency, the military was granted authority to ensure that necessary products, including as rice and sugar, were sold at regulated government prices - but this has done little to alleviate people's suffering. WA Wijewardena, a former deputy governor of the central bank, cautioned that regular people's hardships would compound the financial crisis, making life more difficult for them. According to Guptil, the World Bank estimates that 500,000 individuals have slipped into poverty since the pandemic began.

Guptil also stated that the government has resorted to temporary relief measures, such as credit lines to import foods, medicines, and fuel from its neighbouring ally India, as well as currency swaps from India, China, and Bangladesh, and loans to purchase petroleum from Oman, in an attempt to temporarily ease the problems and stave off difficult and most likely unpopular policies. In order to save currency, the Sri Lankan government also proposes to pay off its past oil obligations with Iran by giving them tea worth USD 5 million per month.

Furthermore, in the wake of the continued financial crisis and dollar crunch, Colombo has decided to liquidate three overseas diplomatic offices as of December 2021 in order to minimise costs. These steps, however, would only provide short-term relief, and the loans will have to be repaid at exorbitant interest rates, adding to Sri Lanka's debt burden, according to Guptil.

(With inputs from agencies)

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