Sri Lanka says economy collapsed, pins last hopes on IMF

Sri Lanka says economy collapsed, pins last hopes on IMF
Women wait in a queue to buy kerosene in Colombo, Sri Lanka, June 11, 2022, as the country faces the worst economic crisis in decades. (AP Photo)
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Updated 22 June 2022

Sri Lanka says economy collapsed, pins last hopes on IMF

Sri Lanka says economy collapsed, pins last hopes on IMF
  • PM says ‘only option’ for the country is an IMF bailout
  • Sri Lanka cannot even purchase imported fuel due to heavy debts of its petroleum corporation

COLOMBO: Sri Lanka’s prime minister said on Wednesday its debt-laden economy has collapsed after months of shortages of food, fuel and electricity and is unable to even pay for essentials such as oil imports.  

For months, Sri Lanka has lacked the foreign currency to import essential commodities. The country of 22 million people last month defaulted on a multimillion-dollar foreign debt payment, deepening its worst crisis since it gained independence from Britain in 1948.

“We are now facing a far more serious situation beyond the mere shortages of fuel, gas, electricity and food. Our economy has faced a complete collapse. That is the most serious issue before us today,” Prime Minister Ranil Wickremesinghe told Parliament.

Wickremesinghe, who took office in May and is also the finance minister, said the government had failed to act in time to turn the situation around as the country’s foreign reserves plunged.

“We lost out on this opportunity. We are now seeing signs of a possible fall into the very bottom,” the prime minister said. “The Ceylon Petroleum Corporation is $700 million in debt. As a result, no country or organization in the world is willing to provide fuel to us. They are even reluctant to provide fuel for cash.”

There have been extreme shortages of fuel, food and, lately, medicines, which has brought the health system to the verge of collapse. Sri Lanka’s inflation rate is now running at 40 percent.

Sri Lanka has been supported mainly by Indian loans amounting to $4 billion, and government officials from New Delhi will arrive in Colombo on Thursday to discuss further assistance. But Wickremesinghe said these were “not charitable donations” and Sri Lanka cannot remain dependent on the neighboring country.

“We have sought more loans from India, but India cannot continue to lend us. We also need to work out a system to pay off loans,” he said, adding that “the only safe option” for the country was an International Monetary Fund bailout.

“This is our only option. We must take this path. Our aim is to hold discussions with the IMF and arrive at an agreement to obtain an additional credit facility.” While the government expects to sign an agreement with the IMF in July, it may take months before any relief is felt.

“We are targeting to reach a staff-level agreement with the IMF by mid-July. Disbursement of funds will require board approval, which will take many more months and also be subject to progress shown on the debt restructuring front,” Murtaza Jafferjee, economist and chairman of the Colombo-based think tank Advocata Institute, told Arab News.

“We have been to the fund 16 times before, so they are no strangers to us. The fund invariably gets bad press and politicians try to paint them as the bogeyman, but they are here by our invitation. What they are recommending is to get us back to a sustainable path and, if we agree to it, they will provide some interim funding for us to meet our short-term needs.”

Tighter fiscal policy and other reforms agreed with the IMF could bring macro stabilization, but it will take years for Sri Lanka’s economy to rebound from the crisis.

“I am expecting an economic contraction between 5-10 percent of the gross domestic product. In the formal sector, this will mean establishments will go out of business and people will lose jobs,” Jafferjee said.

“Sri Lankans will have to face many deprivations for a few years until we mend ourselves.”