Sri Lanka to opt for austerity measures amid deepening economic crisis

Sri Lankan President Gotabaya Rajapaksa has ordered cutting down on all state expenses including unnecessary fleets of vehicles being used by ministries as the government grapples with a worsening economic crisis in the country

Oct 12, 2021
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Sri Lanka

Sri Lankan President Gotabaya Rajapaksa has ordered cutting down on all state expenses including unnecessary fleets of vehicles being used by ministries as the government grapples with a worsening economic crisis in the country. The prices of essentials, including bread, wheat flour, milk soar after the government removed controlling measures last week. 

The Cabinet held a meeting on Monday evening where the government took stock of the crisis. Despite rising fuel prices, the government hasn’t allowed Ceylon Petroleum Corporation, a state-owned firm to increase prices, raising fear of further losses to oil firms. 

Sri Lanka last month had imposed an economic emergency to control the prices of essentials. However, the government crackdown on businesses further created a shortage of goods in the market, which in turn discoured importers. Measures were withdrawn last week as the situation deteriorates further. 

For common people, the situation is quite grim. The island nation, which was already struggling economically, has just come out of a month-long lockdown a few weeks ago. Thousands of people have lost their jobs; industries are in poor shape because of severe import restrictions put by the government to control dollar outflow.  

To reduce ballooning losses to oil companies, Sri Lanka Energy Minister Udaya Gammanpila had earlier hinted at increasing fuel prices--a demand rejected by President Rajapaksa on Monday. Ministers were instructed to find ways to control the crises without increasing prices. 

The country’s official gross domestic reserves dropped to around $2.5 billion in September 2021-- a decline of almost 28 percent in comparison to August when it was around $3.5 billion, official data showed, amid continued liquidity injections.

Almost two years back, in July 2019, the country’s forex reserves were $7.05 billion when it started inflationary policy and has never been able to collect forex reserves since. Tourism--which came to halt during the pandemic--also jolted the country as it used to be one of its biggest forex sources.

Sri Lanka was hit by a $2.3 billion balance of payments deficit in 2020 and $2.7 billion by July 2021, not counting the latest reserve losses. Despite $1.5 billion currency swap agreement with China, and later $200 million with Bangladesh, Sri Lanka failed to establish its balance of payment crisis and forex reserve. 

Last week, the government had confirmed that it had been in touch with Indian officials for a $500 million credit line. 

(SAM)