Srilanka, a country that remains separated from the world geography as an island in the Indian Ocean has continuously been under economic tensions, either it be due to the long-lasting Civil War in the past or piling debts, what many terms a white elephant. The charm of Sone Ki Lanka seems to be restrained only in the mythology as economic tensions further tighten up.
The major contributor to the Srilankan economy has been the service sector which accounts for around 60%, followed by industry and agriculture contributing near to 26% and 8% respectively. These figures are in contrast to some of its neighbors such as Nepal and India in South Asia where agriculture contributes more than 20% to the overall economic growth. The falling agricultural productivity in Srilanka has continuously forced it to import a large chunk of its consumption. The major contributors to Srilankan foreign currency reserves have continuously been Tourism, Tea Industry, Information Technology, and Remittance. In addition to these sources, Srilankan Government in recent years has continuously taken debts from China, Japan, India, International Capital Market, and Multilateral Development Banks. The debts of the country have continuously risen and have once already resulted in handing over the operation of one of its ports to a Chinese Company for defaulting payments.
Most of the country's needs are fulfilled through imports which have also created a trade deficit with almost all of its trading partners. This trend of imports has continuously created strain in the foreign currency reserve of Srilanka. Depleting foreign currency reserves creates a negative impact on its economy, as this results in the shortage of goods and services within the country, creating a chain effect that starts trapping the entire economic cycle. A country that is not self-reliant to meet its basic needs from domestic production requires huge foreign currency reserves to trade with other countries, such that the economic cycle can move uninterrupted.
Recently, Srilankan foreign currency has depleted down to 1.6 B USD from 2.8 B USD in July 2020 and 7.5 B USD in November 2019. The cumulative debts of the country had risen up to 35 B USD by April 2021 and growing. A country that has just 1.6 B USD of foreign currency reserves has to pay 4.5 B USD by the end of this year which includes payment of 500 M USD of an international sovereign bond. The reliance on other countries for most of its consumption might wash away existing 1.6 B USD foreign currency reserves in a month. Payment of 500 M USD sovereign bond on January 18 2022 will create an enormous tension to the country's economy. To deviate from such a situation, the chances of the country defaulting the payment are high. This has also resulted in the downgrading of the country's credit rating to CCC which indicates a possible payment default and bankruptcy.
Srilankan government has already pleaded with one of its major lenders — China to restructure its debts so that the country could get time to fight the economic tensions created by the aftermath of COVID restrictions. The country's economic tensions arise during a time when the entire global economy is under tension due to COVID-19. Though the Srilankan government has been successful to pay off its recent obligations either through re-investing, additional debts, or selling off its gold reserves, it seems difficult for the government to meet future obligations which are due this year. A move by the Srilankan government to pay off its debt to Iran through monthly export of tea worth 5 M USD has already shown the inability of the government to clear off its debt if these are not restructured. The lenders too are not in the mood of restructuring as the dent in the economy seems to grow larger as time passes.
Srilankan government has tried every alternative to increase its foreign currency reserve to meet its obligation. This includes credit lines to import foods, medicines, and fuel from its neighboring ally India, as well as currency swaps from India, China, and Bangladesh, and loans to purchase petroleum from Oman. The government also decided to close three overseas diplomatic missions from December 2021 to cut down expenditure in the face of the ongoing financial crisis and dollar crunch. Something that remained much controversial was banning the import of fertilizers. This ban of fertilizers created a negative impact on the country's food supply as farmers were reluctant to farm in fear of losses due to low yield. The country also restricted the exchange of more than 200 Srilankan Rupee for dollars and requested its citizen for any foreign currency that they might have as a change while returning from abroad. The government also stopped traders from entering into forward currency contracts. The Srilankan government which had more than 20 tons of gold reserves, has already fallen down to less than 3 tons and depleting. The government has tried every possible way to boost its economy with no alternative for sealing the hole causing depletion.
It is not for the first time that the country is facing low foreign currency reserves. The country experienced the same trend after the end of the civil war. Though the country was able to boost up its reserves as a result of improved credit rating and international debts, it seems difficult for the country to use the same reform as in 2009 to take away the country's financial position from strain. One of its neighbors, India which has slowly started moving in as a global leader too faced a similar situation in the year 1991. The then Indian Government had to step into devaluation of its currency, increase in interest rates, use its heavy gold reserves to get foreign currency reserves, and economic reforms such as creating an open market to move out of the difficult economic situation. India's open market initiative turned profitable and since then has seen an enormous increase in its foreign currency reserve.
Srilanka's gold reserves are not high enough to pull in restructuring possibilities. In addition, falling credit ratings make it difficult to fetch additional debts or convince lenders to reinvest. The Srilankan government is still hedging its bets that government-to-government deals — involving swaps, credit lines, equity sales, and foreign direct investment (FDI) — will come in time to avert a major crisis.
Sri Lanka approached its regional powerhouses — China and India — for swaps and other credit lines early on. In what appears to be a reciprocal gesture, laws to ease rules and regulations governing FDI for the China-backed Colombo Port City were fast-tracked. India’s Adani Group was given a 51 percent stake to develop Colombo port’s west container terminal. Several overtures were made to Middle Eastern countries, especially for oil import credit lines. A US$3.6 billion deal with Oman is on hold though, following a request for an offshore block in the Mannar Basin for oil exploration in lieu of interest payments. In this mixed bag is yet another controversial agreement to transfer a 40 percent government equity stake in a natural gas power plant to a US-backed firm. The latter deal has even pitted the ruling coalition partners against each other.
Even if the government is successful in securing some short-term funds to meet its immediate foreign debt settlements, alongside a quickened pace of FDI inflows, the scale of imbalances suggests that building more effective policy strategies will require near-universal sacrifice from Sri Lankans in the year to come. The only option that might help Srilanka boost its economy will be to identify unexplored monetary resources that, might be exploited to boost up its export and increase FDI. The country will have to let foreign parties come inside its country, exploit its resources for the short term and then slowly end its reliance on other countries and restrain any new debts that are strictly not required.
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