The Democratic Socialist Republic of Sri Lanka is an island country situated in the Indian ocean. On 1st April, Sri Lanka’s President Gotabaya Rajapaksa declared an Emergency. This is the second time in a year that Rajapaksa has resorted to this measure. To deal with the hoarding of essential commodities when the economic crisis had begun to manifest itself in all its severity he declared an Emergency on August 30 last year too.
Why Did Sri Lanka Facing This Crisis?
Experts say the roots of this crisis, lie in economic mismanagement by governments that created and sustained a twin deficit of budget shortfall alongside a current account deficit. But the current crisis was accelerated by the VAT tax cut. Rajapaksa pledged during a 2019 election campaign that took place months before the COVID19 outbreak. Lately becomes the reason for the revenue shortage in Sri Lanka’s economy.
What Happened With Foreign Debt?
The country had just $2.31 billion in reserves, but it failed to face debt repayments of about $4 billion as of February 2022. The largest share of Sri Lanka’s external debt at $12.55 billion, with the Asian Development Bank, Japan, and China among other major lenders. The IMF said that public debt had reached “unsustainable levels” and that foreign exchange reserves were insufficient to repay the debt. After providing CBSL with a $1.5 billion swap and $1.3 billion syndicated loan to the government. China plans to offer the island nation a $1.5 billion line of credit with a separate loan worth $1 billion.
Sri Lanka’s Aid
Rajapaksa’s administration and the Central Bank of Sri Lanka (CBSL) resisted calls For months, by experts and opposition leaders to seek help despite rising risks. But after oil prices inflated in Russia’s Seizure of Ukraine in late February, the government drew up a plan to approach the IMF in April.
Sri Lanka has sharply devalued its currency, further fueling inflation and adding to the pain of the public, many of whom face hardship and long queues. Meanwhile, Rajapaksa also needs help from China and India. A $500 million line of credit signed with India in February is expected to arrive within days. Sri Lanka and India have signed a $1 billion line of credit for importing basic necessities, including another $1 billion from New Delhi.