Thursday, September 28

What is happening in Sri Lanka?

That assistance, however, barely scratches the surface of the $6 billion the country will need to stay afloat until the end of the year, according to The Associated Press.

Inflation has soared, reaching 54.6% this June, according to the country’s central bank. The government late last month said the country was nearly out of fuel and halted all petroleum sales except for essential services.

What is causing Sri Lanka’s economic crisis?

Sri Lanka’s low foreign currency reserves means it has been struggling to pay for imports of essential goods. The IMF called the country’s foreign reserves “critically low” at the end of June.

The dwindling reserves followed years of mismanagement of the country’s finances, with the government spending more than the overall income and production of tradable goods and services. To compensate, the government increasingly relied on its foreign reserves to stay afloat.

The fallout of the 2019 Easter Bombings, which saw 260 die in a series of extremist Islamic terrorist attacks in Colombo, and the onset of the pandemic in 2020 has also slashed tourism revenue.

A series of decisions by Rajapaksa, who became president in 2019, also deepened the crisis, starting with large tax cuts within his first year in power.

His decision last April to ban chemical fertilizers also drastically decreased the country’s crop output, which, coupled with Russia’s invasion of Ukraine in February, has exacerbated growing food prices.

The country preemptively defaulted on around $51 billion in foreign debt in April, the first time it had done so. Sri Lanka’s central bank said the country could not afford to repay unless there was a debt restructure.

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People buy vegetables at a market in Colombo on Tuesday. Arun Sankar/AFP-Getty Images

Protesters in Colombo in recent months have blamed the crisis on Rajapaksa, whom they accuse of mismanaging the city’s finances and of corruption.

Who are the Rajapaksas?

Gotabaya Rajapaksa, who will step down as president on Wednesday, hails from a Sri Lankan political dynasty that has dominated leadership for two decades.

A former military officer, Gotabaya served as the country’s defense secretary under his brother Mahinda’s presidency from 2005 to 2015.

Gotabaya appointed Mahinda as prime minister when he was elected in 2019.

President Gotabaya Rajapaksa, right, and his brother, Mahinda Rajapaksa, then the prime minister, in Colombo on Nov. 22, 2019. Ishara S. Kodikara / AFP – Getty Images file

His role in overseeing the government’s crushing of the insurgent force the Tamil Tigers during the country’s civil war earned him the nickname “The Terminator.”

The disgraced president was also considered to have friendly relations with China, and turned to Beijing for financial help as the crisis unfolded, asking for a $1 billion loan in mid-April.

What happens next?

Sri Lanka’s Parliament will agree over the next five days to elect a new president next Wednesday, its speaker announced on Monday.

Talks are still ongoing with the IMF for a potential bailout for Sri Lanka.

Anit Mukherjee, a policy fellow and economist at the Center for Global Development, a nonpartisan think tank in Washington, said any assistance from the IMF or World Bank should come with strict conditions to make sure the aid isn’t mismanaged.

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Still, Mukherjee noted that Sri Lanka is in one of the world’s busiest shipping lanes, so letting a country of such strategic significance collapse is not an option.

Lutz Roehmeyer of Capitulum Asset Management, which holds Sri Lanka dollar bonds, said an IMF deal could happen this year or next, but for bondholders, a restructuring is likely only in 2024 or 2025, not next year.

“It’s total chaos,” Roehmeyer said. “Expectations are that the transition of power will be more chaotic and it will take longer to strike a deal.”

Associated Press and Reuters contributed.

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