Sri Lanka declared a state of emergency on 31ST August. This came due to food shortages, as private banks ran out of foreign currency to fund imports.
President Gotabaya Rajapaksa enacted emergency regulations under the Public Security Ordinance. It authorize government officers to remove food inventories held by traders and arrest anyone who hoards vital food.
WHAT GOVT IS DOING NOW?
Officials have been instructed to guarantee that necessary products such as paddy, rice, and sugar are sold at government-mandated prices or prices based on import charges at Customs, and those supplies are not hidden.
As food prices rise and the country’s foreign exchange reserves fall due to unsuccessful bond auctions. The president has chosen a Major General to oversee food distribution.
Long lines to buy milk powder, sugar, and cooking oil reported around the country. As COVID-19 cases are rising, a 16-day curfew imposed until 8th September.
Udaya Gammanpila, the country’s Energy minister, has urged citizens to utilize gasoline carefully. So that the country can spend its foreign cash on important medications and vaccines.
WHAT HAPPENED TO FOREX RESERVES?
Sri Lanka’s foreign reserves dropped to $2.8 billion by the end of July 2021. Down from $7.5 billion when the administration assumed office in November 2019. For years, the country’s financial problems exacerbated by a large trade deficit.
To save on its dwindling FX reserves, the country banned or licensed hundreds of foreign-made commodities last year, including toothbrush handles, Venetian blinds, strawberries, vinegar, wet wipes, sugar, and even the staple spice turmeric.
Since the 1970s, the country has been subjected to the strictest import regulations. The sole important source of foreign exchange revenues was tourism, which was also harmed by the coronavirus outbreak.
FOREIGN DEBT
Sri Lanka still has two more $1.5 billion foreign loan payments coming in the next 12 months this year. So far, it has paid out $1.3 billion. This is in addition to the debt owed by the local government. Future payments will be more expensive as the Sri Lankan currency depreciates to an all-time high.
The central bank announced in July that it would use currency reserves to partially repay $1 billion in bonds that were due to mature at the end of the month. According to a central bank announcement, the country’s reserves were $4 billion at the time.
PRINTING CURRENCY
213 billion Sri Lankan rupees were utilized to service foreign debt, depleting currency reserves, out of the 650 billion rupees printed in 2020.
Following a failed Treasury bill auction on August 22, the central bank produced 29 billion Sri Lankan rupees and hiked interest rates to 6%, making it the first country in Asia to do so during a pandemic.
Even if the upcoming auctions fail, the apex bank increased the statutory reserve requirement from 2% to 4% on September 1, which is projected to absorb about a billion rupees of surplus liquidity this week. Meanwhile, it failed to sell 92 percent of a 50 billion rupee bond sale on August 30.
Economists believe that printing money to pay off foreign debt results in an instant loss of currency reserves. If economic output fails to support demand, it could lead to a rapid spike in inflation.
CONCLUSION
Sri Lanka is in serious peril and will need to take a comprehensive approach to solve the crisis, putting citizens’ rights first. Before China begins its Cheque Book Diplomacy, India should step forward to lend a helping hand to Sri Lanka in this difficult time.
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