Monday Market Musings>>> Sri Lanka; the Current Situation
Picture Credit: Fitch Solutions website
Sri Lanka’s economic outlook is highly uncertain due to fiscal and external imbalances. Reserves have all but dried up, leaving no way to pay for imports. Of course, this means basic goods have become scarce. With frequent (almost daily) power cuts, commodity values eroding, and prices rapidly escalating, the country is hanging on by a thread.
The economy has recorded an annual average growth of 6.8% from 2010 to 2014 after the war, but unfortunately, ever since the post-war euphoria faded, the economic situation started crumbling. From 2015 to 2019, the economic growth has been an average of 3.7% per annum, before plunging in to a recession during the lockdowns brought on by the pandemic in 2020. However, a brief recovery was made in 2021, when the average economic growth increased 3.7%.
In 2022, the situation worsens, as the already fragile economy buckled under the weight of the forex crisis spiraling out of control and starting a chain of more problems. There is a maturation of approximately USD 4 billion worth of debt for this year alone, and due to the forex crisis, importing of basic goods such as foods, medicine and also fuel has become next to impossible.
Picture Credit: ABC News website
Economic growth has dropped to a -1.5%. On a year-on-year basis, inflation had reached a record high of 21.5%, and food inflation reaching 30.2% this March. Experts say that the country is undergoing it worst financial crisis in over 70 years, and it shows. The general public of Sri Lanka are at their whit’s end, thousands upon thousands of protesters have gathered to show their displeasure, all around the island. With tempers running high and heavy tension, the situation is dire.
Security forces are working to restore order, after bouts of mob violence on the streets. Earlier this week, Central Bank chief warned that; unless a new government is urgently appointed, Sri Lanka’s economy would “collapse”. On Thursday, a travel ban had been issued by a court, on the former prime minister Mahinda Rajapaksa, his son Namal Rajapaksa and 15 others, preventing them from travelling overseas, due to the investigations taking place on the attacks on peaceful protesters at “GotaGoGama” and “MynaGoGama”.
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The President has recently announced that he will appoint a new prime minister and cabinet this week. Media reports quote that former prime minister Ranil Wickremesinghe could become the next prime minister. The President also stated that various steps will be taken in order to amend the Constitution to empower Parliament.
In order to somehow crawl out of the mess that is the current state of the Sri Lankan economy, experts believe urgent policy measures need to be taken. Sri Lanka would also have to address its structural sources for existing vulnerabilities. According to the World Bank, necessary adjustments may affect the growth in an adverse way, and impact poverty in a not so friendly way in the early stages, but will correct the vulnerabilities and will ultimately be better for the economy.
May 9th 2022 | 9:00 PM