Sri Lanka’s debt crisis and political unrest cripple the country’s economy

Shoppers, retailers and street vendors in the Pettah district of Colombo, Sri Lanka. (Jonathan Wijayaratne/Bloomberg)

Sri Lanka’s economy has shrunk the most in two years amid a debt crisis that has sparked a default and widespread protests that have crippled the nation and led to the ousting of the president.

Gross domestic product fell 8.4% in the three months to June from a year ago, according to data released by the Statistics Department on Wednesday. It’s the slowest reading since the corresponding quarter of 2020 and compares with an estimate of a 10% contraction in a Bloomberg survey of economists. Sri Lanka’s economy contracted by 1.6% in the January-March quarter.

Industrial production contracted 10% while the agricultural sector fell 8.4%, the data showed.

Sri Lanka’s $81 billion economy collapsed after fuel supplies ran out due to the financial crisis, spurring inflation which accelerated to a new high of 64.3% in August and more than doubling the key rate this year, rising from 6% to 15.5% at the end of the year. 2021.

A central bank governor’s resignation in early April foreshadowed the island nation’s misery in the second quarter, where it faced more credit rating downgrades and a market rout as it declared default. of payment. In late June, citizens were advised to stay home for two weeks as the government restricted fuel consumption, stoking deeper discontent.

The economic collapse, the most severe in its independent history, turned into political chaos which led to the formation of a new government. President Ranil Wickremesinghe, who was elected by parliament after his predecessor Gotabaya Rajapaksa fled the country, is now trying to push through economic and constitutional reforms to help reverse the trend.

“We see things getting worse before they get better,” said Dimantha Mathew, head of research at First Capital Holdings, adding that the impact of rising inflation, shortages and power outages will affect consumption.

Earlier this month, the authorities reached an agreement with the International Monetary Fund for a $2.9 billion loan that will be crucial to rebuild reserves, unlock more financing and begin a debt overhaul. Sri Lanka is also gearing up for talks with India, Japan and China, its biggest bilateral creditor, on restructuring nearly $13 billion in debt.

“Getting debt relief assurances from creditors – a prerequisite for aid – will likely take time,” according to Bloomberg Economics’ Ankur Shukla. “A delay in the release of funds means that domestic supply shortages will remain in place, at least in the short term, and will further hamper production.”

Sri Lanka needs about $5 billion for essential imports to weather the storm for six months, and nearly $1 billion to bolster its currency, Wickremesinghe said in June.

The national currency has plunged more than 40% this year and stocks have fallen nearly 20%, while the national 7.55% 2030 dollar bond is listed at around 30 cents on the dollar against nearly 50 cents at the beginning of the year.

Robert P. Matthews