Sri Lanka’s financial and political crisis, driven by a mix of high debt, rising inflation and the country’s poor economic management, is now a cautionary tale for a number of other indebted countries that are now increasingly vulnerable to the recent confluence food shortages. , inflation and rising interest rates in the US.
People line up outside a bakery to buy bread in Sidon, Lebanon, last month.
Photo: mahmoud zayyat/Agence France-Presse/Getty Images
Countries such as Zambia and Lebanon are already in the grip of crises and are seeking international help to provide loans or restructure their debts, while Pakistan’s new government, which came to power in April, says it has narrowly averted a default in recent weeks . due to the rising fuel import bill. Foreign reserves held by the central bank were reduced to cover less than two months of exports, largely closing off Pakistan’s prospects of tapping international financial markets. China, a close ally, provided a $2.3 billion loan in June to shore up foreign currency reserves. Islamabad is seeking a bailout from the International Monetary Fund. The country scrapped a $600 million-a-month gasoline subsidy in June to stabilize public finances and allow continued talks with the IMF. It has repeatedly raised petrol and electricity prices in recent weeks to keep up with the international price of oil. In Laos, inflation reached an annual rate of 24% in June. The lack of dollars is squeezing imports of gasoline and other basic goods. The World Bank estimates that Laos had foreign exchange reserves of $1.3 billion at the end of 2021, enough to pay for just over two months of imports. The World Bank recently cut its forecast for growth in developing economies to 3.4% this year from 4.6% previously, citing the effects of soaring food and energy prices and the rapid rise in borrowing costs following the hikes of interest rates in the US. Russia’s invasion of Ukraine has sent fuel and food prices skyrocketing, while rising US interest rates have sent many currencies to multi-year lows, making fuel and other imports more expensive. This has presented countries that also service high levels of debt with difficult choices.
There was no gas available at a gas station in Colombo, Sri Lanka last month.
Photo: chamila karunarathne/Shutterstock
In Sri Lanka’s case, the coronavirus pandemic – which decimated foreign currency earnings from tourism – and global inflation helped turn Sri Lanka’s economy upside down, but its precarious economic position had taken root earlier , due to a build-up of debt for infrastructure spending and sweeping tax cuts that have depleted government revenues, as well as a ban on chemical fertilizers that shrink crop production. The country defaulted on its debt in May and a severe shortage of foreign currency has left it unable to secure energy supplies, leading to frequent blackouts and shortages at gas pumps. Food inflation jumped to 80.1% last month. For most Sri Lankans, daily life in recent months has revolved around spending hours queuing for fuel or waiting for electricity to come back on. But those who wandered into the president’s residence on Sunday got a glimpse of the lifestyle of the political elite who presided over the unfolding financial crisis. Months of anti-government protests and public anger over the government’s handling of the economy culminated on Saturday with thousands of protesters in the Sri Lankan capital Colombo storming and occupying the official residences of Mr Rajapaksa and Prime Minister Ranil Wickremesinghe. Mr Wickremesinghe tweeted that his resignation would pave the way for the leaders of Sri Lanka’s political parties to assemble an all-party interim government, before fresh elections are held at a date yet to be decided.
Security forces used water cannons to disperse anti-government protesters in Colombo, Sri Lanka on Saturday.
Photo: chamila karunarathne/Shutterstock
The developments boosted the spirits of the new occupants of the presidential residence, who lounged on beds and upholstered chairs, played the piano and even found time for a mock discussion of the International Monetary Fund at a huge conference table. Some, however, were angered by the contrast with ordinary Sri Lankans struggling to get by. “We don’t have fuel, food and gas for cooking,” said 60-year-old wharf worker Wijitha Kumara. “But while we suffer, Gotabaya lived a life of luxury.” Protesters continued to occupy the president’s palace in Sri Lanka, enjoying the compound’s swimming pool and exercising in the gym. The speaker of Sri Lanka’s parliament said President Gotabaya Rajapaksa plans to resign after the raid on his residence on Saturday. Photo: Chamila Karunarathne/ EPA-EFE via Shutterstock Some governments around the world are trying to soften the blow of food and energy inflation by launching new subsidies and boosting social spending programs to stave off unrest and hunger amid rising costs of daily living. Many countries are adopting new brochures even as they struggle with budget deficits and economies still reeling from the pandemic’s dislocation. Analysts have warned that the subsidies and new social spending could push their governments into deep financial trouble. In Europe, governments from Germany to Greece, Spain and Portugal have announced tax breaks and energy subsidies in recent months. In Africa, Nigeria recently announced $9.6 billion to subsidize fuel prices, while Zambia is spending $200 million to extend its fuel subsidy, despite mounting debt in both countries. Meanwhile, Asian countries such as the Philippines, Singapore and Indonesia are boosting social spending, often targeting lower-income families with direct cash assistance. Sri Lanka’s political turmoil could slow its efforts to emerge from its economic crisis. Mr. Wickremesinghe, the prime minister, is also the finance minister and the main point-person leading the country’s negotiations with the IMF over a possible multibillion-dollar bailout.
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A personal, guided tour of the best saddles and stories every day in The Wall Street Journal. The global lender said on Sunday it was closely monitoring developments. “We hope for a resolution of the current situation that will allow the resumption of our dialogue on an IMF-backed program,” he said. By Sunday, calm had largely been restored to the streets of Colombo. The light security presence allowed protesters to enter and exit the presidential residence, a cavernous colonial-era building with whitewashed walls, unhindered. Mr Kumara, the wharf official, said he urged everyone around him not to damage any property as it was paid for with public money. And despite being saddened to see the lavish lifestyle enjoyed by Mr Rajapaksa, Mr Kumara said he allowed himself the satisfaction of taking a selfie. “We also feel that we are victorious against an evil ruler,” he said.
Sri Lankan protesters enjoyed the swimming pool at the president’s official residence on Sunday.
Photo: DINUKA LIYANAWATTE/REUTERS
—Said Shah contributed to this article. Write to Philip Wen at [email protected] Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8
