Dr. Forqan Uddin Ahmed :
Sri Lanka is passing through an acute economic crisis due to depletion in foreign reserves. There has been a decline in foreign reserves since August 2020, but in November 2021 it dipped to a precarious level. It was just enough for meeting one month’s import. A month later, there was a slight increase but even then, it was not enough for two months’ import.Reportedly, the gross foreign reserves dropped 24 per cent further in January 2022 to US$ 2.3 billion. Depletion in foreign reserves has led to uncertainty about Sri Lankan government’s ability to account for import of essential items and debt servicing. Sri Lankan authorities have acknowledged that they are facing increasing difficulty in settling the import bills due to the dollar crunches, particularly for import of fuel for daily requirements. The government and the Central Bank of Sri Lanka (CBSL) are however, confident that Sri Lanka will not default in debt servicing due to the current economic crisis. CBSL Governor believes that the pressures on the economy will ease soon with a steady inflow of forex. The situation on the ground as well as the analyses of government’s policy measures and global geopolitical-economic developments including the fallout of Russia-Ukraine war, nonetheless suggest that a state of uncertainty is hovering over Sri Lankan economy.
Since its independence, trade deficit has been a consistent feature of Sri Lankan economy, as its import bill has always been more than the revenue earned through export. Huge amount of the foreign exchange earned is being consumed to pay for the import bill for years. In recent years, debt-servicing commitment of the government has put additional pressure on the foreign reserves. On the other hand, foreign exchange inflow to the country declined first due to the impact of Easter Sunday attack on tourism sector in 2019 and then due to the outbreak of global pandemic which severely affected all the main foreign currency earning sectors of Sri Lanka, i.e., tourism, remittances, and export. Due to the foreign reserves crisis, the country is facing severe fuel shortages leading to daily power cuts, shortage of food, medicines, cement and other essential items. Long queues in front of grocery stores, pharmacies and fuel depots in many parts of Sri Lanka indicate the shortage of essential items. Importers are finding it difficult to get Letter of Credit (LOC) issued from the banks due to lack of foreign currency in the country. As a result, many of the containers are stuck at the Colombo port for several days since payments are not settled.
The primary problem Sri Lanka has is that everyone seems to agree the country has too much debt. Is that correct? The answer is not a simple yes or no. The first thing to note is that there is internal debt denominated in Sr Lanka rupees (LKR) that is owed by the government, businesses and consumers to the Sri Lankan banking system. Is there too much debt there? – Probably yes as domestic inflation is high and that indicates too much LKR – denominated debt.But as we all know the real crisis is Sri Lanka’s external debt. The government has a total external debt of about $ 50b USD which needs to be repaid over a period of time. About $ 6b of that has to be repaid in 2022.
Sri Lankan government perceives that the policy of preceding governments over the years to import more than the revenue earned has led to the current foreign-exchange reserves crisis. Loans taken from multilateral institutions have also been believed to be responsible for leading the country to a crisis situation. In addition to this, the Covid-19 pandemic has intensified the crisis, and therefore, one of the major policy priorities for the government is to reduce the import expenditure. Several other ‘homegrown measures’ have also been initiated to reduce capital outflow and increase inflow to strengthen the foreign reserves. The government has approached bilateral partners for loan, credit and currency swap facility to deal with the issue of settling import and debt. Special attention is also being given to boost investors’ confidence while dealing with the crisis situation by not defaulting on debt-servicing.
The Sri Lankan government has banned import of luxury vehicles, chemical fertilisers and food items like turmeric to prevent foreign currency outflows. Import ban on Motor Vehicles has been in effect since March 2020. The government of Sri Lanka has restricted the import of chemical fertilisers and agrochemicals in May 2021. Even though the government justifies the ban to promote organic farming in the country, prevention of outflow of foreign currency was also a factor behind the chemical fertiliser import ban policy. Before the ban, Sri Lanka used to spend around US$ 400 million annually on fertiliser imports and more than US$ 7 million for turmeric imports. US$ 1.5 billion was spent in 2018 on vehicle imports. The government’s justification for the import ban is that it would prevent outflow of foreign currency and encourage domestic production which could lead to growth of exports.
It is believed that the current economic situation is going to prevail at least for another two or three years. Sri Lanka needs a bailout with long-term, low-interest loans, with a grace period long enough to sustain during the current economic situation. Opposition parties and many experts in Sri Lanka believe that relying only on bilateral assistance is not enough, and are therefore pressing the government to approach IMF. At the domestic level, the government has to face the wrath of common people, opposition parties and even disappointment of some of the coalition partners because of its handling of the economic crisis, pandemic, overall governance and foreign affairs. All these factors cumulatively will pose serious challenges for Sri Lanka to overcome the current crisis. Even though the government as of now has refused to approach the IMF for assistance, it might be compelled to accept the same at a later date.
Finally we can say that, economic crisis in Srilanka is really a problem and challenge for the nation. But where there are problems, there are also ways to getting out of problems or crisis. Proclamation of emergency is not the only solution. If there is political decision on the basis of consensus and government takes the remedial measures, we are hopeful of overcoming the troublesome situation. A few years back Sri Lanka was not in bad position. Education, health, GDP and social securtity were almost sound and balancing. However, the dictatorship and malpractice of state power by vested groups must be stopped.
(The writer is former Deputy Director General, Bangladesh Ansar & VDP).
