Inflation rises to an all-time high in Sri Lanka, the nation on the verge of bankruptcy

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Inflation rises to an all-time high in Sri Lanka, the nation on the verge of bankruptcy

According to the media reports, Sri Lanka is going through a deepening humanitarian and financial crisis. The country could go into bankruptcy in 2022 because of the inflation level rising to a record high.

The government of Sri Lanka announced on August 30, 2021, a national financial emergency after the nation’s currency had a steep fall which eventually led to the spike of food prices as well. Sri Lanka is said to be going through two deficits, one is the fiscal deficit and the other is the trade deficit. The deficits have been a major part of the last 10 years in the country. The debt level in Sri Lanka since 2014 has been rising and reached an all-time high of 42.6 percent of GDP in the year 2019.

The overall debt of the country was estimated at around $33 billion in 2019 which put a massive burden on the national economy for the servicing of debt. Sri Lanka’s credit rating was degraded from B to C. The companies included Standard and Poor’s, Moody’s and Fitch which made it difficult for the nation to obtain funds from the ISBs (International Sovereign Bonds).

The primary cause of Sri Lanka’s financial crisis is the low growth rate currently at 4 percent. Due to the huge debt service repayment obligations, the situation is only worsening and not getting better. In November 2021 the foreign currency available in Sri Lanka was merely $1.6 billion and the nation had to pay an estimated amount of $7.3 billion in domestic and foreign loans which includes a $500 million international sovereign bond repayments by January 2022 according to the reports.

The most pressing problem for Sri Lanka has been the huge foreign debt and debt service burden to China specifically. Sri Lanka owes China more than $ 5 million in debt and it also took an additional $ 1 billion from Beijing to control the acute financial crisis which is being paid in installments. 

It is being estimated that the foreign reserves of Sri Lanka will completely exhaust by January 2022 and in order to pay all the necessary payments, it will need to borrow at least $437 million. The more concerning issue is the payments of debt service worth $4.8 billion which is due from February to October 2022. Inflation rose up to 11.1 percent in November last year and the families are struggling to afford basic necessities there.

After the declaration of economic emergency in Sri Lanka, the power was handed over to the military to provide essential goods including rice and sugar but the military has done nothing much to ease people’s worries.

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