01/27/2022, 14.37
SRI LANKA
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Sri Lanka’s foreign debt crisis leads to shortages in basic necessities

by Arundathie Abeysinghe

For Sri Lanka, imports are increasingly expensive. China and India have granted lines of credit, but analysts note that they are short-term solutions. Due to the inability to buy fuel, the government announced daily power cuts.

Colombo (AsiaNews) – In addition to a growing debt crisis and a shortage of foreign currency due to steadily dwindling reserves, Sri Lanka is also facing a serious shortage in basic necessities including food, medicines, gas and fuel. Soaring food prices are making life harder for a majority of Sri Lankans.

As the value of the national currency (rupee) l drops, imports become more and more expensive. Foreign exchange inflows have shifted from formal to informal channels.

Remittances by Sri Lankans living abroad have dropped to US$ 271 million in November 2021, an all-time low since 2010.

Meanwhile, the island nation's external debt is rising and the payment of more than US$ six billion this year is a serious source of concern.

The only positive sign in this depressing scenario is the currency swaps and lines of credit with India and China.

India has agreed to a currency swap and granted two lines of credit worth US$ 500 million each. One will be used to import food and medicines, while the other will be used to import fuel from India.

Both financial tools are important, taking into account the precarious condition of the country’s currency reserves, but insufficient to meet Sri Lanka's immediate needs, including the purchase of basic necessities.

China also granted a currency swap with the yuan worth 1.5 billion dollars and a US$ 500 million line of credit. Chinese credit will be useful to import raw materials for the manufacturing sector.

Analysts agree that these measures are only short-term solutions. For economists, Sri Lanka’s debt should be restructured through foreign financial assistance.

A realistic or market-determined exchange rate would also increase foreign remittances, whilst increasing domestic production of goods and services is crucial to solving the balance of payments problem and would be a more long-term solution to the crisis.

According to Sri Lankan Central Bank Governor Ajith Nivard Cabraal, the US$ 500 million International Sovereign Bond was paid on schedule on 18 January, confirming that Sri Lanka could meet its commitments and avoid bankruptcy.

To bring currency flows back into formal channels and alleviate shortages, analysts note that the rupee should be devalued and reach more realistic rates.

Due to the severe shortage of dollars and the inability to import enough fuel, Sri Lanka is also suffering from a severe power crisis.

According to sources from the Ceylon Electricity Board, several power plants will have to close due to lack of fuel and at least 183 megawatts will be lost in the power grid, with subsequent power cuts at peak times, especially at night, if more fuel is not provided to the power plants.

Energy Minister Udaya Gammanpila warned that daily power cuts could be up to four hours if the country fails to secure a "large loan" by March 2022.

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