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India steps into rescue Sri Lanka amidst exodus in worst economic crisis

Sri Lanka is going through its worst economic crisis since its Independence with people dying while waiting in queues for fuel, and authorities are scrapping school exams after running out of dollars to import paper and ink.

Driven out by hunger and loss of jobs, people from the island nation are seeking refuge in India, which is doing its best to help the neighbouring country

India has extended financial assistance to the tune of US$2.4 billion in the last three months to Sri Lanka, which includes a $400 billion RBI currency swap, deferral of a $500 million loan and a $1.5-billion credit line for importing fuel, food and medicines.

Further the cash strapped government has sought another additional credit line of $1.5 billion from India to import essentials, the island nation’s central bank governor Ajith Nivard Cabraal said on Monday, amid its worst economic crisis in decades

India has offered financial aid to tide over the island nation’s foreign currency woes, its foreign exchange reserves having dwindled to about US$2.3 billion one month’s import cover.

In mid-2021, Sri Lanka received help from Bangladesh, by way of a currency swap worth $200 million. It has sought another swap $ 250 million from Bangladesh Foreign Minister Dr A K Abdul Momen who is now in Sri lanka to attend the BIMSTEC summit.

Inflation is in double digits, as is the fiscal deficit as a proportion of GDP. Foreign debt as a percentage of GDP is in the three digits.

NCPI based headline inflation (Y-o-Y) increased to 17.5 per cent in February 2022 from 16.8 percent in January 2022 due to increases in prices of items in both Food and Non-food categories, the Central Bank announced.

Meanwhile, Food inflation (Y-o-Y) and Non-food inflation (Y-o-Y) recorded at 24.7 per cent and 11.0 per cent, respectively, in February 2022.

As every cloud has a silver lining, Sri Lanka’s merchandise exports increased by 9.91% to US$ 1,046 Million in February 2022 compared to February 2021 as per the data released by the Sri Lanka Customs. Further, it is a 5.8% increase when compared to February 2020.

Export Development Board (EDB) Chairman Suresh D de Mel said; “Sri Lanka’s Merchandize Exports maintained the above $ 1 billion mark continuously from the beginning of this year, recording an increase of 9.91% to US$ 1.05 billion in February 2022 compared to last year. This was also the ninth consecutive month of having over $1 Billion revenue.

Even as Sri Lanka has given priority to meeting its debt servicing obligations to foreigners, international rating agencies downgrade Sri Lanka’s credit rating and the current account deficit was 3.8 percent of GDP in 2021.

Sri Lanka’s official remittances in January 2022 were down 61.6 per cent from a year earlier, as overseas workers sent money through unofficial channels at higher parallel exchange rates.

Foreign remittances dropped to US $259.2 million, more than a 60 per cent decrease from January 2021 levels while it has further come down to 204.9 million around 63 percent decrease from February 2021 ,Central Bank data showed.

Further earnings from tourism recorded a meager sum of $173.6 million last month although tourist arrivals have increased to 96507.

Sri Lanka imports a whole lot of what it consumes but has generally managed to pay for its imports with earnings from plantation exports, healthy tourism earnings and a steady infusion of foreign currency borrowings. Tourism accounts for some 10-12% of GDP.

. Before the economy would recover from this disaster, reductions in the value-added tax contributing to a fall in revenues rather than to a boost in economic activity, the pandemic struck the next year.

The economy shrank, the government responded with effective vaccination, welfare handouts, a fiscal deficit in excess of 10% of GDP and an easy money policy. The economy recovered somewhat in 2021, but tourism stayed depressed, the current account widened, and inflation climbed.

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