Will the ‘lifebuoy’ appear?
The government of President Gotabaya Rajapaksa has come under increasing pressure due to missteps when it comes to managing the economy. The country has halted foreign debt payments in an effort to maintain its meager foreign exchange reserves.
In Monday, Sri Lanka will begin negotiations with the International Monetary Fund (IMF) on a lending program, while seeking help from other countries, including neighboring India and China.
Fault next to fault
Economic mismanagement by governments has weakened Sri Lanka’s public finances, causing national expenditures to exceed incomes. The production of goods and services is not enough to meet demand.
The situation was further aggravated by the introduction of deep tax cuts by the Rajapaksa government shortly after the Rajapaksa government took office in 2019. This came just a few months before the crisis caused by the Covid-19 pandemic.
The pandemic has engulfed several sectors of the economy, mainly tourism, which is already growing and has helped make Sri Lanka very profitable. The inflexible exchange rate has reduced remittances from overseas workers.
Rating agencies, concerned about government finances and inability to pay off large foreign debt. As a result, these agencies downgraded Sri Lanka’s credit rating from 2020 onwards, eventually leaving the country out of international financial markets.
But to keep the economy going, the government still relies heavily on its foreign exchange reserves, expending more than 70% in just two years.
By March, Sri Lanka’s foreign exchange reserves stood at just $1.93 billion, not enough to cover a month’s worth of imports and leading to a growing shortage of everything from diesel oil. to some food items.
JP Morgan analysts estimate the country’s total debt will top $7 billion this year, with a current account deficit of around $3 billion.
What did the government do?
Faced with a rapidly deteriorating economic environment, the Rajapaksa government chose to wait, rather than act quickly, and seek help from the IMF and other sources.
For months, opposition leaders and experts have urged the government to act, but they stand firm, hoping tourism and remittance flows will rebound.
Newly appointed Finance Minister Ali Sabry told Reuters in an interview earlier this month that key officials in the Sri Lankan government and central bank did not understand the gravity of the problem and were reluctant to let go. The IMF intervened. Mr. Sabry, along with a bank governor, has been put on a new team to deal with the situation.
However, after becoming aware of the crisis, the government sought help from countries, including India and China. Last December, the Finance Minister went to New Delhi to discuss and settle credit swaps of $1.9 billion from the country.
A month later, President Rajapaksa asked China to restructure the repayment of about $3.5 billion in debt that Sri Lanka owed Beijing. The country has also provided Sri Lanka with a $1.5 billion yuan swap by the end of 2021.
Where will the future go?
Finance Minister Sabry will begin negotiations with the IMF about a loan package of up to $3 billion over three years.
An IMF program, which typically mandates financial discipline from borrowers, is also expected to help Sri Lanka attract an additional $1 billion in support from other multilateral institutions such as the World Bank and the World Bank. Asian Development.
In total, the country needs about $3 billion in bridging funding over the next six months to help restore supplies of essential goods including fuel and medicine.
Sources told Reuters that India is ready to provide Sri Lanka with another $2 billion to reduce its dependence on China. Sri Lanka also sought an additional $500 million line of credit from India for fuel.
With China, the government is also discussing a credit line of $1.5 billion and a syndicated loan of up to $1 billion. Besides the swap last year, Beijing also extended a $1.3 billion syndicated loan to Sri Lanka when the pandemic began.
at Blogtuan.info – Source: cafebiz.vn – Read the original article here
