The President of the Asian Infrastructure Investment Bank (AIIB) Jin Liqun, encouraged Sri Lanka to consult the IMF on the current economic challenges confronting Sri Lanka during his meeting with the Ambassador of Sri Lanka to China, Dr.Palitha Kohona. He also explained that the AIIB was ready to support Renewable Energy projects which would help Sri Lanka to achieve its target of obtaining 70% of its energy needs from Renewable Energy by 2030.
Embassy of Sri Lanka
Beijing
01 April, 2022
Island nation needs an urgent IMF bailout to avoid bankruptcy in the coming months
When Sri Lanka President Gotabaya Rajapaksa campaigned for the presidential election in 2019, he advanced a vision of political stability and economic progress after years of chaos and decline.
Three years later, Sri Lanka’s economy has hit rock bottom, with protests spreading across the country over electricity outages, food and medicine shortages and soaring prices. The shortages are becoming so acute that some believe they could spiral into a humanitarian crisis.
Reports said the Ceylon Petroleum Corp. requested the public not to queue for diesel on Wednesday and Thursday after the state-run refiner failed to unload a shipment of 37,500 metric tonnes of the fuel. Wire agencies interviewed doctors and health workers who spoke of dire shortages of imported vital drugs and diagnostic chemicals.
Sri Lanka’s trade deficit doubled to US$1.1 billion in December. It reportedly had about $2.3 billion of foreign-exchange reserves last month and faces a $1 billion bond repayment in July.
Authorities have devalued the local currency, curbed imports and raised fuel prices and interest rates in a bid to control the situation, so far to no avail. Stock trading was briefly halted for the second straight day Wednesday after a key index plunged 5%.
Part of the crisis has been driven by the Covid-19 pandemic and the ongoing Russia-Ukraine war, which among other things has drastically driven up global oil prices. But the real story of Sri Lanka’s descent into chaos starts with the rise of President Gotabaya and his populist, strong-man rule in 2019.
This rule was facilitated by hard-line Sinhala Buddhist nationalist forces, including those dominated by former military men such as Viyathmaga. These organizations projected themselves as agents of transformation and their model of centralized governance was presented as what was needed after three disastrous years of the coalition government of the United National Party and the Sri Lanka Freedom Party.
To dramatically alter Sri Lanka’s fortunes, a new policy vision prepared in part by Viyathmaga, “Vistas of Prosperity and Splendor”, was issued to guide Sri Lanka’s path to glory.
Apart from other issues – including the existing constitution – plaguing Sri Lanka, this vision identified that “the prevailing tax system has contributed to the collapse of the domestic economy.”
Accordingly, the Gotabaya government introduced, soon after coming into power, massive tax cuts that reduced its revenue by a whopping 28%, Sri Lanka central bank data shows. This was a major turn away from the path of fiscal consolidation undertaken by the previous government.
Moreover, this decision ran counter to the International Monetary Fund’s 2019 review of the Sri Lankan economy, which it said needed “sustained efforts to mobilize revenues will be needed in 2020 … to protect the economy against shocks, allowing for exchange rate flexibility in the event of market pressures.”
As a result, Colombo was left with what the IMF called in early 2020 a “weak revenue performance and expenditures overrun”, pushing the island nation down an unstable fiscal path. This was followed by a formal closure of the IMF’s program in the country.
In early 2020, the revenue shortage was further exacerbated by the Covid-19 pandemic, which stripped Sri Lanka of a critical source of foreign currency: tourism. With the pandemic and subsequent lockdowns being a global phenomenon, worker remittances, traditionally a key source of foreign exchange for Sri Lanka, fell hugely by almost 23%.
In April-May 2020, Sri Lanka’s sovereign ratings were downgraded to B-negative. Among the reasons cited for the downgrade was the Gotabaya regime’s decision to introduce tax cuts that exacerbated already rising public and external debt challenges.
Crucially, this downgrade also locked Sri Lanka out of international financial markets. In December 2021, the rating was further downgraded to “CC”, deepening market perceptions of the nation’s financial straits.
While Sri Lanka’s access to foreign exchange was curtailed, Colombo continued to settle its debt repayments using existing foreign-exchange reserves throughout this period.
Even though in the following months Sri Lanka’s reserves continued to fall – dipping from $7.6 billion in 2019 to $2.3 billion in October 2021) – Colombo did not consider going to the IMF for an emergency bailout that ultranationalists – including the Rajapaksa family itself – think would compromise Sri Lanka’s sovereignty.
Instead, Sri Lanka opted for currency swap deals with China and India, which, apart from temporarily bolstering the reserve position, did nothing to consolidate Colombo’s failing fiscal position.
As a result, in early 2022, Sri Lanka’s actual useable reserves fell below US$1 billion, prompting Colombo to simultaneously approach India and the IMF for urgent help.
New Delhi, seeing in Sri Lanka’s acute economic crisis an opportunity to consolidate its own geopolitical foothold vis-a-vis China, has agreed to open a $1 billion credit line to help Colombo buy essential goods, including oil and medicine. Colombo is also already in fresh talks with India for yet another loan of $1.5 billion. This is apart from the ongoing talks with the IMF for a bailout package.
This has all been necessitated by the fact that there is no way Colombo can avoid going bankrupt without securing a bailout. There is simply no way for Colombo to repay the $6.9 billion owed in 2022 with less than $1 billion currently in reserves and the economy still staggering. The IMF, the bogeyman of Sri Lankan nationals, is now the only source of sufficient funds to avoid bankruptcy.
Gotabaya’s government, meanwhile, is in denial. The president addressed his nation in the third week of March outlining how the crisis was not his doing while confirming his government’s decision to accept the IMF’s bailout conditions to be formally discussed in April.
“Subsequent to my discussions with the International Monetary Fund, I have decided to work with them after examining the advantages and disadvantages,” Rajapaksa told his beleaguered nation in a somber address. As several analysts have pointed out, the speech aimed to ease investors’ growing concerns that Sri Lanka will be bankrupt in a month or so.
Sri Lanka, very much like the heavily indebted Argentina, is also seeking to go to the World Bank after securing an IMF bailout package to provide for what Sri Lankan officials are calling “budgetary support.”
A World Bank statement released to the media said that the Bank is not currently in talks with Colombo, but that they are “engaging with the authorities to identify a comprehensive structural reform program needed to ensure sustainable growth, and around which such support may be possible in the future.”
Most analysts believe that Colombo will be able to secure an IMF bailout, but its road to recovery is going to be long and difficult insomuch as it would depend upon how robust Sri Lanka is in implementing the IMF’s recommended structural reforms.
These will include cutting government expenditures and subsidies, privatizing state-owned enterprises, stopping money printing, floating the exchange rate and laying off public sector workers, among other tough measures.
While these reforms, if implemented, will take time to bear fruit, industries like tourism are unlikely to flourish amidst the worst power cuts and oil and medicine supply shortages in recent memory. Meanwhile, the ruling Sri Lanka Podujana Peramuna (SLPP) will have to ensure it does not internally disintegrate amid the inevitable backlash against the IMF and World Bank’s recommended reforms.
If the SLPP government is able to survive, one thing that it can and must do immediately is to drastically cut its expenses and take the opposition parties on board to minimize the political fallout. Reports indicate that the SLPP is moving in this direction. It has decided after the opposition demanded to table the IMF report in the parliament for debate.
What this means in practical terms is shifting from an exclusionary and ultranationalist set-up to a more inclusive dispensation.
Whereas the recent exit of hardcore nationalist ministers like Udaya Gammanpila indicates a probable restructuring of the government, Gotabaya’s recent – and first-ever – meeting with the Tamil National Alliance also indicates a shift towards a more inclusive approach to stabilize its own regime and discourage the opposition from launching agitation.
While this may be merely symbolic, there is no denying that the way out of the crisis involves both political and economic restructuring.
The High Commission of India has strongly denied the ‘blatantly false and completely baseless’ reports in a section of media that India is dispatching its military personnel to Sri Lanka.
The Indian High Commission also condemned such irresponsible reporting and expects the concerned to desist from spreading rumours.
The High Level Road has been blocked due to a demonstration raised by students of the Sri Jayawardenapura University, in the continuation of protests against the government.
There is a heavy traffic congestion in the area at present, reports said.
The protesters claim that all parties, including the general public and university students, have severely been affected due to the current situation of the country.
The anti-government protests fanning flames across the island are seemingly growing and the assault on those who had participated in the demonstrations in Mirihana two nights ago has severely been criticised.
Our correspondents said that security has been tightened for the Madiwela MP quarters and that additional security has been deployed following reports on future protests being organised at the site.
MIAP
It has been proposed to enforce an islandwide curfew from midnight Saturday (02) in the possibility of an unrest being provoked due to the anti-government protests set across the country on April 03, sources claimed.
It has been predicted that there may be an escalation of unrest on April 03 as a chain reaction triggered by the unrest that took place in front of the President’s residence in Mirihana yesterday.
The matter has also been discussed at the special meeting held with the Ruling Party MPs under the patronage with President Rajapaksa yesterday afternoon.
These Ruling Party MPs urged the President to enforce an islandwide curfew effective from April 03. However, the President has not responded to this request, according to sources.
A decision may be taken in the next few hours based on the situation, sources added.
Meanwhile, S.B. Dissanayake who was recently sworn in as the Minister of Industries has risen to speak at the discussion held with the Ruling Party MPs, but the other participants have objected to him, urging that further problems should not be incited, our correspondent said.
Police Curfew has been imposed in the Western Province from 12 am to 06 am today (02).
Responding to the recent arrests and use of unlawful force by Sri Lankan authorities against protestors gathered outside President Gotabaya Rajapaksa’s residence to agitate against the economic crisis in the country, Amnesty International’s South Asia Regional Director, Yamini Mishra, said:
“The Sri Lankan authorities must not use unnecessary or excessive force to disperse protesters who are suffering the consequences of an economic crisis that is spiralling out of control. Even in instances where protests turn violent, law enforcement officers must only use force where absolutely necessary and it must be strictly proportionate to the situation. The state must refrain from using force to create fear and stifle dissent.
“According to sources, 54 individuals, including journalists covering the incident, have been arrested, and dozens more injured. Many of them have been assaulted and subjected to torture or other ill treatment in police custody. The protestors also complained that police had recorded their statements without giving them access to lawyers.”
“Sri Lankan authorities must refrain from arresting people for exercising their right to peaceful protest and follow due process safeguards such as prompt access to legal counsel. We are very concerned by the human rights violations currently taking place in Sri Lanka as the authorities are using unlawful force and restrictions on movement in an attempt to quell dissent.”
Amnesty International
Indian External Affairs Minister Dr. S. Jaishankar assured the support of the Government of India to ensure economic stability in Sri Lanka and reiterated that India understands the real issues of Sri Lanka being a close neighbour.
The Indo-Lanka Foreign Ministers also witnessed the signing of seven more instruments between agencies of both countries which are expected to intensify cooperation in the fields of education, culture, security, power, fisheries, and technology
Indian External Affairs Minister Dr. S. Jaishankar, who was on a three-day official visit to attend the 5th BIMSTEC Summit in Colombo, called on the Foreign Affairs Minister Prof. G.L Peiris.
Capitalising on the opportunity on the sidelines of the summit, the two Ministers reviewed the broad spectrum of political, economic, social, and cultural ties between Colombo and New Delhi that inextricably intertwined the two nations from time immemorial.
The two leaders who took stock of the ties expressed satisfaction over the ever-growing two-way bond and resolved to explore ways and means to further elevate the robust relations that both nations enjoy.
Minister Peiris briefed Indian Minister Dr. Jaishankar on the successful discussion the President of Sri Lanka and the Government had with the Tamil National Alliance (TNA) last week during which the President had acknowledged the concerns of the people of the North and East in terms of reconciliation.
Minister Jaishankar welcomed the positive developments that the Government of Sri Lanka has made towards resolving issues concerning Tamils in Sri Lanka and achieving long-lasting solutions.
Prof. Peiris stressed the importance of maintaining high-level engagements in a consistent manner and expressed that the relations between the two countries are mutually rewarding.
Dr. Jaishankar while thanking Sri Lanka for organising the BIMSTEC Summit amid many challenges, expressed hope that the forthcoming Summit will be a productive one.
India also relies considerably on Colombo port for global trade given it is a transhipment hub. 60% of India’s trans-shipment cargo is handled by the port. India-linked cargo, in turn, accounts for 70% of the port’s total trans-shipment volume.India has traditionally been among Sri Lanka’s largest trade partners.
The main investments from India are in the areas of petroleum retail, tourism and hotel, manufacturing, real estate, telecommunication, banking and financial services.
A number of leading companies from India have invested and established their presence in Sri Lanka. These include Indian Oil, Airtel, Taj Hotels, Dabur, Ashok Leyland, Tata Communications, Asian Paints, SBI and ICICI Bank.
Although Sri Lanka holds minor importance to India in terms of trade, it is a geopolitically important country and India needs to counter the growing Chinese influence on its economy.
At $4.8 billion, India’s annual exports to Sri Lanka accounted for just 1.3% of India’s total exports. Sri Lanka’s share in India’s total imports was just 0.16%.
Sri Lanka has offered greater use of the Colombo Port by Bangladesh for the country’s export and import trade, according to the Bangladeshi foreign ministry.
Sri Lankan President Gotabaya Rajapaksa made the offer on Wednesday when meeting with Bangladeshi Foreign Minister AK Abdul Momen in Colombo. Momen is currently in Sri Lanka for the 18th BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation) ministerial meeting.
“Sri Lankan President offered greater use of the Colombo Port by Bangladesh for transportation of Bangladeshi trade goods,” Bangladesh’s Ministry of Foreign Affairs said in a statement.
President Rajapaksa thanked Bangladesh for continued support in various multilateral fora and both sides agreed to closely work together in the future. The two sides also discussed the possible new areas for cooperation including food security, ICT, health care and blue economy.
Both sides also agreed to expedite and complete the negotiations and approval process of pending bilateral instruments for greater benefits of the two peoples, according to the ministry.
In this regard, they welcomed the progress made for an early conclusion of bilateral Preferential Trade Agreement for enhancing and facilitating trade between the two South Asian countries.
Momen also called for enhanced trade and tourism by commercial shipping and cruise shipping lines between Chattogram, Bangladesh’s premier seaport, and the Colombo Port, said the foreign ministry.
On Wednesday, Rajapaksa also chaired the virtual 5th BIMSTEC summit while urging enhanced cooperation among the BIMSTEC member countries of India, Bangladesh, Nepal, Bhutan, Sri Lanka, Myanmar and Thailand.
Meanwhile the progress with regard to a Preferential Trade Agreement was discussed between the Ministers of Foreign Affairs of Sri Lanka and the Foreign Minister of Bangladesh.
Minister of Foreign Affairs Prof. G. L. Peiris held discussions with the Foreign Minister of Bangladesh Dr. A. K. Abdul Momen MP, on the sidelines of the 5th Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) Summit held in Colombo under the Chairmanship of President Gotabhaya Rajapaksa on 30 March, 2022.
Among matters discussed was cooperation in the field of higher education, synergies in respect of the apparel industry in the two countries, greater connectivity and integration between the ports of Colombo and Chittagong, and collaboration in international trade.
Sri Lanka’s monthly tourist arrivals crossed the 100,000 mark for the first time in two years, whilst surpassing last year’s 194,500 figure already, despite multiple internal and external challenges.
As per the latest data released by the Tourism Ministry , a total of 101,192 tourists have arrived in the country during the first 29 days of this month, whilst pushing the cumulative figure to 280,026. On an average 3,489 tourists arrived daily in the country.
From 1 to 7 March, 25,507 tourists were received, whilst from 8 to 14 March, 24,891 travellers, 15 to 21 March, 24,918 holidaymakers and 22 to 29 March 25,876 visitors arrived in the country.
India topped as the highest tourist source market with 22,231, followed by the UK with 11,634 tourists, Germany 9,140, Russia 8,716 and France 5,493.
March figures were also boosted by over 600 French women athletes who arrived in the country to participate at the 20th edition of the ‘Raid Amazones’ which commenced the second leg of the adventure trail. France also emerged as the fifth top tourist source market in March.
In terms of cumulative tourist arrival data, India stands tall in top rank with 46,726 tourists, followed by Russia with 37,534, UK 29,718, Germany 22,259 and France 14,808. The other markets include Ukraine, Poland, Kazakhstan, Australia and the US.
Tourism accounts for close to 5% of Sri Lanka’s economy. The industry is hopeful of achieving 1.3 million visitors by the end of this year, while expecting tourism earnings to be $ 2.4 billion.
“Sri Lanka has gained the international spotlight after many years. Our successful vaccination rollout and Government’s eased post-COVID travel restrictions were key reasons for this level of confidence that we are witnessing from the international tourists today,” Tourism Minister Prasanna Ranatunga said.
He added that the market-centric promotions conducted in Russia, Ukraine, France, Germany, and UK in the past one year have impacted positively.
“We also got many international airlines to operate into Sri Lanka post pandemic and the support extended by them have really made a positive impact in bridging the connectivity barriers,” Ranatunga said.
In addition, the Minister asserted that Mattala Airport has re-activated international flights and after 55 years the Colombo International Airport Ratmalana (CIAR) has also recommenced the scheduled regional international flights.
Sri Lanka Tourism officials said that this was one of the greatest achievements the country and the industry celebrated after the Easter Sunday attacks in 2019.
“We hope this trend will continue. Sri Lanka is optimistically moving ahead, amidst all internal and external challenges. Sri Lanka Tourism is making use of every single opportunity, whilst putting much effort to support the tourism industry to progress and achieve the end goal,” he stressed.
He also said that in 2022, the Government has pledged the highest support towards the development of the industry to ensure quicker revival and enhancing the contribution to the socio-economic recovery in the country.
