Wednesday, October 4, 2023

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Sri Lanka faces severe financial crisis amidst rupee and dollar crunch

Sri Lanka is facing a deepening financial and humanitarian crisis with dollar and rupee crunch amidst heavy money printing that could lead it to bankruptcy in 2022 as inflation rises to record levels, official sources warned.

The financial crisis in Sri Lanka is primarily caused by a low growth rate, currently at four per cent and huge debt service repayment obligations and the situation is worsening with high fiscal deficit and trade deficit.

As of January 2022 available foreign currency reserves were just US$ 2.36 billion while in the next 10 months, the government and private sector of Sri Lanka will have to repay an estimated $6.3 billion in domestic and foreign loans

The Country has to pay at least $ 2 billion for debt servicing by march 31 and April this year including a $ 750 million of Sri Development Bonds (SLDB) and Indian Swap and interest payment.

It is estimated that the foreign currency reserves of the country would completely deplete by March 2022 and it would need to borrow at least$ 1 billion for necessary payments.

If the country could get an Indian loan facility of Rs1 billion then it could wither the debt servicing storm, they predicted. .

They further stated that in an “attempt temporarily to ease the problems 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.”

Sri Lanka will be facing severe shortage of rupees while reeling from the foreign reserve issues and the dollar crunch, several top officials warned.

The country’s precarious financial situation has been brought to the notice of Prime Minister Mahinda Rajapaksa at a meeting with senior officials in several l leading ministries recently, PM’s office sources revealed.

They have requested the Prime Minister to brief this situation and convey their warning to the President and the Finance Minister to take immediate remedial measures.

They have also emhssied the need of increasing fuel prices to prevent the impending financial crisis

These officials informed that it was not only the shortage of dollars that the Government had to worry about, but a possible shortage of rupees as well.

It is well known fact that the Government receives money from the sale of Treasury Bills. Around 90 percent of the bills are purchased by state owned funds and private banks while around 10 percent is bought by the Central Bank

Since recently the Central Bank has been purchasing around 90 percent of the bills. The Central Bank finances these purchases by printing money, several economic experts said.

Workers remittances have plunged to a new low of $ 259 million in January 2022which has been executing multiple measures to woo inflows via official channels.

The figure of $ 259.2 million in January is down by nearly 62% from a year ago and lowest in 13 years. The previous lowest was $ 261.6 million in November 2009.

Earnings from Tourism were $ 268.3 million in January this year, compared to $ $5.5 million in January 2021, Central Bank data showed.

The reserve money increased compared to the previous week mainly due to the increase in currency in circulation and deposits held by the commercial banks with the Central Bank

Reserve Money increased to Rs1339.34 billion in Februray 24 from Rs. 1,326.05 billion in Feb 17 .Central Bank data showed.
The total outstanding market liquidity was a deficit of Rs. 673.903 bn by end of last week, compared to a deficit of Rs. 693.539 bn by the end of previous week ending February 18.
During the year up to 25th February 2022, the Sri Lankan rupee depreciated against the US dollar by 0.9 per cent.

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