Tuesday, June 25, 2024

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Sri Lanka’s current crisis raises policy uncertainty

Sri Lanka’s current crisis coupled with peoples up rising against the cost of living amidst scarcity of fuel and cooking gas raised policy uncertaininty compounding external liquidity and fiscal difficulties, Moody’ rating agency claimed.  

The new cabinet of ministers with majority of previous ministers is to be sworn in today Thursday 07 as  all of Sri Lanka’s Cabinet, with the exception of President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa along with the governor of the central bank, tendered their resignations.

In a desperate damage control measure President Gotabaya Rajapaksa has appointed a Presidential Advisory Group on Multilateral Engagement and Debt Sustainability.

Dr. Indrajit Coomaraswamy former Central Bank Governor  , Prof. Shanta Devarajan and Dr. Sharmini Coorey former IMF director  serve as the members of the said advisory group, according to the President’s Media Division (PMD).

The resignations were partly a response to rising public dissatisfaction and social tensions over high inflation, shortages of essential items and
lengthy power cuts, increasing political and policy uncertainty at a time when Sri Lanka is experiencing a severe external liquidity and fiscal crisis and a deteriorating macroeconomic environment. 

The government declared a state of emergency and imposed a two-day countrywide curfew on 2-3 April after protesters demanding the president’s resignation stormed his home.

Protracted political uncertainty is likely to hinder progress in obtaining external financing  from key development partners or attracting foreign direct investment, or both, because of Sri Lanka’s reliance on capital inflows to repay its sizeable foreign-currency obligations.

The difficult political environment could also weigh on policymaking and the economy’s recovery from the pandemic, compounding challenges to fiscal consolidation and government efforts to shore up reserves to service its external debt obligations.

Intensifying social unrest and sporadic curfews are likely to further strain the tourism industry, delaying the recovery in tourism receipts that were a crucial part of thegovernment’s plans to bolster foreign-currency inflows before the pandemic

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