Sri Lanka Crisis

[Thaiyotakamli]

https://www.channelnewsasia.com/commentary/sri-lanka-economic-crisis-china-debt-trap-2626976?cid=FBcna&fbclid=IwAR3rVgAi-sCE5t3Emdlfnn_XszVT2i9AnrtVKcThOyxRyYFMp0qyb9JHueA

 

MUMBAI: The island nation of Sri Lanka is in the midst of one of the worst economic crises it’s ever seen. It has just defaulted on its foreign debts for the first time since its independence, and the country’s 22 million people are facing crippling 12-hour power cuts and an extreme scarcity of food, fuel and other essential items, such as medicines.

Inflation is at an all-time high of 17.5 per cent, with prices of food items such as a kilogram of rice soaring to 500 Sri Lankan rupees (US$1.56) when it would normally cost around 80 rupees (US$0.25). Amid shortages, one 400g packet of milk powder is reported to cost over 250 rupees (US$0.78), when it usually costs around 60 rupees (US$0.19).
 

On Apr 1, President Gotabaya Rajpaksha declared a state of emergency. In less than a week, he withdrew it following massive protests by angry citizens over the government’s handling of the crisis.

The country relies on the import of many essential items including petrol, food items and medicines. Most countries will keep foreign currencies on hand in order to trade for these items, but a shortage of foreign exchange in Sri Lanka is being blamed for the sky-high prices.

IS SRI LANKA CRISIS BECAUSE OF CHINA RELATIONS?

Many believe that Sri Lanka’s economic relations with China are the main driver behind the crisis. The United States has called this phenomenon “debt-trap diplomacy”. 

This is where a creditor country or institution extends debt to a borrowing nation to increase the lender’s political leverage – if the borrower extends itself and cannot pay the money back, they are at the creditor’s mercy.
 

However, loans from China accounted for only about 10 per cent of Sri Lanka’s total foreign debt in 2020. The largest portion – about 30 per cent – can be attributed to international sovereign bonds. Japan actually accounts for a higher proportion of their foreign debt, at 11 per cent.
 

Defaults over China’s infrastructure-related loans to Sri Lanka, especially the financing of the Hambantota port, are being cited as factors contributing to the crisis.

But these facts don’t add up. The construction of the Hambantota port was financed by the Chinese Exim Bank. The port was running losses, so Sri Lanka leased out the port for 99 years to the Chinese Merchant’s Group, which paid Sri Lanka US$1.12 billion.

So the Hambantota port fiasco did not lead to a balance of payments crisis (where more money or exports are going out than coming in), it actually bolstered Sri Lanka’s foreign exchange reserves by US$1.12 billion.

So, what are the real reasons for the crisis?
 

IMF LOANS COME WITH CHALLENGING CONDITIONS

Post-independence from the British in 1948, Sri Lanka’s agriculture was dominated by export-oriented crops such as tea, coffee, rubber and spices. A large share of its gross domestic product came from the foreign exchange earned from exporting these crops. That money was used to import essential food items.

 

Over the years, the country also began exporting garments and earning foreign exchange from tourism and remittances (money sent into Sri Lanka from abroad, perhaps by family members). Any decline in exports would come as an economic shock and put foreign exchange reserves under strain.

For this reason, Sri Lanka frequently encountered balance of payments crises. From 1965 onwards, it obtained 16 loans from the International Monetary Fund (IMF). 

Each of these loans came with conditions including that, once Sri Lanka received the loan, it had to reduce its budget deficit, maintain a tight monetary policy, cut government subsidies for food for the people of Sri Lanka and depreciate the currency (so exports would become more viable).

But usually, in periods of economic downturns, good fiscal policy dictates that governments should spend more to inject stimulus into the economy. This becomes impossible with the IMF conditions. Despite this situation, the IMF loans kept coming, and a beleaguered economy soaked up more and more debt.
 

The last IMF loan to Sri Lanka was in 2016. The country received US$1.5 billion for three years from 2016 to 2019. The conditions were familiar, and the economy’s health nosedived over this period. Growth, investments, savings and revenues fell, while the debt burden rose.
 

DID SRI LANKA GOVERNMENT MAKE FATAL MISTAKES?

A bad situation turned worse with two economic shocks in 2019. First, there was a series of bomb blasts in churches and luxury hotels in Colombo in April 2019. The blasts led to a steep decline in tourist arrivals – with some reports stating up to an 80 per cent drop – and drained foreign exchange reserves. 

Second, the new government under President Gotabaya Rajapaksa irrationally cut taxes.

Value-added tax rates (akin to some nations’ goods and services taxes) were cut from 15 per cent to 8 per cent. Other indirect taxes such as the nation-building tax, the pay-as-you-earn tax and economic service charges were abolished. 

Corporate tax rates were reduced from 28 per cent to 24 per cent. About 2 per cent of the gross domestic product was lost in revenues because of these tax cuts.
 

In March 2020, the COVID-19 pandemic struck. In April 2021, the Rajapaksa government made another fatal mistake. To prevent the drain of foreign exchange reserves, all fertiliser imports were completely banned. 

Sri Lanka was declared a 100 per cent organic farming nation. This policy, which was withdrawn in November 2021, led to a drastic fall in agricultural production and more imports became necessary.

But foreign exchange reserves remained under strain. A fall in the productivity of tea and rubber due to the ban on fertiliser also led to lower export incomes. Due to lower export incomes, there was less money available to import food and food shortages arose.

Because there is less food and other items to buy, but no decrease in demand, the prices for these goods rise. In February 2022, inflation rose to 17.5 per cent.

In all probability, Sri Lanka will now obtain a 17th IMF loan to tide over the present crisis, which will come with fresh conditions.

A deflationary fiscal policy will be followed, which will further limit the prospects of economic revival and exacerbate the sufferings of the Sri Lankan people.

[Ody_2004]

read abt this “debt-trap diplomacy”.. seem a few other countries kenna on the Belt and Road Initiative.. ran into debt n gave up their land to Xi ge.. which been turn into naval port n other strategic use..

[Beregond]

1 hour ago, Thaiyotakamli said:

https://www.channelnewsasia.com/commentary/sri-lanka-economic-crisis-china-debt-trap-2626976?cid=FBcna&fbclid=IwAR3rVgAi-sCE5t3Emdlfnn_XszVT2i9AnrtVKcThOyxRyYFMp0qyb9JHueA

 

MUMBAI: The island nation of Sri Lanka is in the midst of one of the worst economic crises it’s ever seen. It has just defaulted on its foreign debts for the first time since its independence, and the country’s 22 million people are facing crippling 12-hour power cuts and an extreme scarcity of food, fuel and other essential items, such as medicines.

Inflation is at an all-time high of 17.5 per cent, with prices of food items such as a kilogram of rice soaring to 500 Sri Lankan rupees (US$1.56) when it would normally cost around 80 rupees (US$0.25). Amid shortages, one 400g packet of milk powder is reported to cost over 250 rupees (US$0.78), when it usually costs around 60 rupees (US$0.19).
 

On Apr 1, President Gotabaya Rajpaksha declared a state of emergency. In less than a week, he withdrew it following massive protests by angry citizens over the government’s handling of the crisis.

The country relies on the import of many essential items including petrol, food items and medicines. Most countries will keep foreign currencies on hand in order to trade for these items, but a shortage of foreign exchange in Sri Lanka is being blamed for the sky-high prices.

IS SRI LANKA CRISIS BECAUSE OF CHINA RELATIONS?

Many believe that Sri Lanka’s economic relations with China are the main driver behind the crisis. The United States has called this phenomenon “debt-trap diplomacy”. 

This is where a creditor country or institution extends debt to a borrowing nation to increase the lender’s political leverage – if the borrower extends itself and cannot pay the money back, they are at the creditor’s mercy.
 

However, loans from China accounted for only about 10 per cent of Sri Lanka’s total foreign debt in 2020. The largest portion – about 30 per cent – can be attributed to international sovereign bonds. Japan actually accounts for a higher proportion of their foreign debt, at 11 per cent.
 

Defaults over China’s infrastructure-related loans to Sri Lanka, especially the financing of the Hambantota port, are being cited as factors contributing to the crisis.

But these facts don’t add up. The construction of the Hambantota port was financed by the Chinese Exim Bank. The port was running losses, so Sri Lanka leased out the port for 99 years to the Chinese Merchant’s Group, which paid Sri Lanka US$1.12 billion.

So the Hambantota port fiasco did not lead to a balance of payments crisis (where more money or exports are going out than coming in), it actually bolstered Sri Lanka’s foreign exchange reserves by US$1.12 billion.

So, what are the real reasons for the crisis?
 

IMF LOANS COME WITH CHALLENGING CONDITIONS

Post-independence from the British in 1948, Sri Lanka’s agriculture was dominated by export-oriented crops such as tea, coffee, rubber and spices. A large share of its gross domestic product came from the foreign exchange earned from exporting these crops. That money was used to import essential food items.

 

Over the years, the country also began exporting garments and earning foreign exchange from tourism and remittances (money sent into Sri Lanka from abroad, perhaps by family members). Any decline in exports would come as an economic shock and put foreign exchange reserves under strain.

For this reason, Sri Lanka frequently encountered balance of payments crises. From 1965 onwards, it obtained 16 loans from the International Monetary Fund (IMF). 

Each of these loans came with conditions including that, once Sri Lanka received the loan, it had to reduce its budget deficit, maintain a tight monetary policy, cut government subsidies for food for the people of Sri Lanka and depreciate the currency (so exports would become more viable).

But usually, in periods of economic downturns, good fiscal policy dictates that governments should spend more to inject stimulus into the economy. This becomes impossible with the IMF conditions. Despite this situation, the IMF loans kept coming, and a beleaguered economy soaked up more and more debt.
 

The last IMF loan to Sri Lanka was in 2016. The country received US$1.5 billion for three years from 2016 to 2019. The conditions were familiar, and the economy’s health nosedived over this period. Growth, investments, savings and revenues fell, while the debt burden rose.
 

DID SRI LANKA GOVERNMENT MAKE FATAL MISTAKES?

A bad situation turned worse with two economic shocks in 2019. First, there was a series of bomb blasts in churches and luxury hotels in Colombo in April 2019. The blasts led to a steep decline in tourist arrivals – with some reports stating up to an 80 per cent drop – and drained foreign exchange reserves. 

Second, the new government under President Gotabaya Rajapaksa irrationally cut taxes.

Value-added tax rates (akin to some nations’ goods and services taxes) were cut from 15 per cent to 8 per cent. Other indirect taxes such as the nation-building tax, the pay-as-you-earn tax and economic service charges were abolished. 

Corporate tax rates were reduced from 28 per cent to 24 per cent. About 2 per cent of the gross domestic product was lost in revenues because of these tax cuts.
 

In March 2020, the COVID-19 pandemic struck. In April 2021, the Rajapaksa government made another fatal mistake. To prevent the drain of foreign exchange reserves, all fertiliser imports were completely banned. 

Sri Lanka was declared a 100 per cent organic farming nation. This policy, which was withdrawn in November 2021, led to a drastic fall in agricultural production and more imports became necessary.

But foreign exchange reserves remained under strain. A fall in the productivity of tea and rubber due to the ban on fertiliser also led to lower export incomes. Due to lower export incomes, there was less money available to import food and food shortages arose.

Because there is less food and other items to buy, but no decrease in demand, the prices for these goods rise. In February 2022, inflation rose to 17.5 per cent.

In all probability, Sri Lanka will now obtain a 17th IMF loan to tide over the present crisis, which will come with fresh conditions.

A deflationary fiscal policy will be followed, which will further limit the prospects of economic revival and exacerbate the sufferings of the Sri Lankan people.

烂泥扶不上墙😂

[Jamesc]

Ah Tiong loan shark is the worse.

 

[Thaiyotakamli]

1 hour ago, Ody_2004 said:

read abt this “debt-trap diplomacy”.. seem a few other countries kenna on the Belt and Road Initiative.. ran into debt n gave up their land to Xi ge.. which been turn into naval port n other strategic use..

But surprisingly this article mention IMF And japan also created debt trap. 
 

china own about 10% of total debt while japan about 11%. Also 16x IMF loan made monetary policy even tighter and causing more stress for the economy of sri lanka.

 

maybe the reduction of tax also play part.

 

thats why we welcome 9% GST😅😅🥹

[Ct3833]

We should feel blessed .

[Voodooman]

I never believe OBOR was devised to entrap poor Asian countries into debt crisis so that China can take over the country/ asset. That is angmo propaganda.      

After plundering and pilfering their ex colonies and weak countries like imperial China and divided India, of resources and wealth for hundreds of years, they should STFU. 

Not saying China is doing it for free, they are building influence and helping their own MNCs. Noone forces anyone to sign on to these projects.

1 hour ago, Ody_2004 said:

read abt this “debt-trap diplomacy”.. seem a few other countries kenna on the Belt and Road Initiative.. ran into debt n gave up their land to Xi ge.. which been turn into naval port n other strategic use..

. 

[Voodooman]

24 minutes ago, Thaiyotakamli said:

But surprisingly this article mention IMF And japan also created debt trap. 
 

china own about 10% of total debt while japan about 11%. Also 16x IMF loan made monetary policy even tighter and causing more stress for the economy of sri lanka.

 

maybe the reduction of tax also play part.

 

thats why we welcome 9% GST😅😅🥹

For once, we agree on motherland. 😂😂😂

[t0y0ta]

Sri Lanka govt is CMI. Trying to blame others like China or IMF is just trying to shift attention.

[yishunite]

As long as got corruption any loan can be a trap whether tiong or amdk ah long

[Thaiyotakamli]

13 minutes ago, Voodooman said:

I never believe OBOR was devised to entrap poor Asian countries into debt crisis so that China can take over the country/ asset. That is angmo propaganda.      

After plundering and pilfering their ex colonies and weak countries like imperial China and divided India, of resources and wealth for hundreds of years, they should STFU. 

Not saying China is doing it for free, they are building influence and helping their own MNCs. Noone forces anyone to sign on to these projects.

. 

Rather than external factor

 

its more the internal factor. Blame the incompetent sri lanka government for not being able to steer away country from crisis including covid.

 

the high corruption and complex bureaucracy also a factor why sri lanka remain third world nation despite having substantial natural resources and good location

[Kb27]

Looks like the China debt-trap coming into fruition.

Other countries partaking in the same poison must be sweating now. Who's next ? 😁

[ER-3682]

Covid 19 also caused Sri Lanka lost alot of Tourist Earning...Corruption also a big problem there,our Northern Neighbour also no better,luckily they have Oil & other Natural Reserve,or else also like Sri Lanka.

[Mustank]

Last time I got keep some Ceylon stamps  

[Mustank]

No choice have to buy Russian oil Liao

[Watwheels]

They have a commie background. They look like a democratic country but isnt. So far most commie countries have failed or are struggling. No wonder China(fellow commie) would lend them money whereby imf (controlled by the West) must have given them lot of T&C for a loan. Maybe Russia will sell them oil at a cheaper rate cos fellow commie. But I doubt Sri Lanka's govt will last long. They cannot borrow money forever.

[1fast1]

I would not blame China for Sri Lanka's mess, just as I would not blame the ravening wolf that the sheep let blithely into their fold. 

This is squarely on Sri Lanka.

Edited April 16, 2022 by Turboflat4

[yishunite]

All about their management cockups: https://www.channelnewsasia.com/commentary/sri-lanka-economic-crisis-china-debt-trap-2626976