Sri Lanka’s Steep Climb Out of the Economic Abyss

Efforts to restore Sri Lanka’s shattered economy and instill some confidence in the government are proving just as difficult. as many they were predicting mid-2022, when thousands of protesters stormed the presidential palace and ousted President Gotabaya Rajapaksa.

On the streets, people were justifiably fed up when fuel imports stopped. Essential items, including rice and medical supplies, were nearly impossible to obtain. Consumers were restricted to one tub of butter per day, and the price of imported canned pears reached $10.

The country had defaulted on its foreign debt of $51 billion, headline inflation was 70 percent, lending rates were above 15 percent, and economic growth for the second quarter of the calendar year was astounding. 8.4 percent negative.

Sri Lankan economist and Senior Research Associate at ODI Global in London, Ganeshan Wignarajasays life in Sri Lanka has improved since images of protesters bathing in the president’s pool were broadcast around the world.

“Today there is some normality on the economic and political front,” he said, adding that President Ranil Wickremesinghe deserves respect for negotiating a $2.9 billion bailout with the International Monetary Fund (IMF) and guarantees from major lenders, China , Japan and India. .

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In a bid to rebuild the balance sheet, Sri Lanka will cut its army by a third to 135,000 by next year and to 100,000 by 2030. Each ministry has been told to cut spending by five percent, and India it has lent the island state about $4 billion in food and financial assistance.

This included $1.5 billion for imports and $3.8 billion in currency swaps and lines of credit. Sri Lankan Telecommunications and Sri Lankan Airlines are expected to be privatized.

“Paris Club countries like Japan agreed from the beginning. India has just agreed and there are rumors that China will also give its guarantees soon. Once all the guarantees are obtained, IMF board approval could happen in a matter of months,” Wignaraja added.

He said that then the real hard work begins with the restructuring of the country’s foreign debt and the implementation of the IMF program.

“Revenue-based fiscal consolidation will raise taxes, cut spending, privatize state-owned companies, and make the Central Bank more independent. Economic reforms are also needed to reduce bureaucratic regulations and make the economy more outward-oriented,” he said.

“But the recovery will take some time to take hold due to the cost of living crisis faced by the population, political discontent and the lack of foreign exchange for imports. The economy could stabilize in 2024.”

Sri Lanka owes China more than $6 billion, or about 10 percent of its foreign debt, after heavy investments in the Hambantota port and the port city of Colombo, among other infrastructure projects, and Beijing has been accused of delaying in resolving the debt crisis.

However, it is unlikely that China (and indeed India, Japan, and the IMF) pay attention to calls of 182 economists who, on January 23, called for the cancellation of Sri Lanka’s debt.

It’s a contentious point for the Rajapaksa clan, which rose to fame by ending Sri Lanka’s 26-year civil war, gaining political power and standing up to China at every turn, much to the chagrin of India and Japan. His problems are increasing.

Sri Lankan courts have ruled that Gotabaya, his brothers Mahinda, a former president, and Basil, a former finance minister, could be prosecuted for economic crimes and their fall from grace has also emboldened separate efforts to Keep it responsible for war crimes.

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On January 10, Canada penalized Gotabaya and Mahinda for committing “serious and systemic human rights violations” towards the end of the conflict in 2009 when, according to the United Nations, at least 40,000 Tamil civilians were killed. Two others were also sanctioned.

“The military shelled hospitals and self-declared ‘no fire zones’, killing and injuring thousands of Tamil civilians. Many captured combatants and civilians were forcibly disappeared and are still missing,” Human Rights Watch said last week.

In addition, the Committee to Protect Journalists has also pointed out that 13 journalists were killed between 2005 and 2015 when Mahinda presided, “due to a systematic assault on the press.”

These issues are gaining as much steam as the economic crisis and will attract a lot of attention in the coming months and years if Sri Lanka is to regain its lost pride.

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