A Country Admitted by the Prime Minister to be Bankrupt - Sri Lanka

According to Sri Lankan media reports, on the evening of July 9, President Rajapaksa informed Speaker Abe Wadena that he would resign from the presidency on July 13.

Earlier in the day, the Sri Lankan Prime Minister's Office issued a statement saying that Sri Lankan Prime Minister Wickremesinghe was willing to resign.

The Indian Ocean island of 22 million people is facing severe foreign exchange shortages and restrictions on essential imports of fuel, food, and medicine, plunging it into its worst economic crisis since independence in 1948.

Soaring inflation, which hit a record 54.6% in June and is expected to hit 70% in the next few months, has created difficulties for the population.

This week, Sri Lanka's prime minister admitted "national bankruptcy".

The Prime Minister of Sri Lanka told Congress a few days ago that the country has gone bankrupt and that this unprecedented economic crisis will last at least until the end of next year. "We are now negotiating with the International Monetary Fund (IMF) as a bankrupt country, and this is the truth." In reality, next year is going to be pretty miserable and probably won’t get better until the end of 2023.

Social and political instability could derail Sri Lanka's talks with the International Monetary Fund as it seeks a $3 billion bailout, restructures some external debt, and raises funds from multilateral and bilateral sources to ease dollar shortages.

On June 30, a new round of negotiations between the IMF and the Sri Lankan government ended, but the two sides have not yet reached an agreement.

Sri Lanka's ongoing bailout talks with the International Monetary Fund (IMF) depend on reaching a debt restructuring plan with creditors by August, the prime minister said. “As the country is in bankruptcy, we have to submit another sustainable debt service plan to them." "Only when (the IMF) is satisfied with the plan will we be able to reach an agreement.”

He said inflation is expected to rise to 60% and the government is aiming to stop rupee printing to curb inflation.

Unlike corporate bankruptcy, the state has independent sovereignty, and state bankruptcy will not lead to the disappearance of the state, nor will bankruptcy liquidation be carried out. But a country's bankruptcy will lead to currency devaluation, falling national debt, severe inflation, soaring unemployment, people paying for debts, etc., which will have a serious impact on the country's economy and people's lives.

Affected by the epidemic and the conflict between Russia and Ukraine, Sri Lanka, with a population of only 22 million, is facing severe shortages of crude oil, food, and medicine. The government has shut down non-essential public services to save fuel. Sri Lanka's energy minister said the country had less than a day left in fuel stocks and had sent a delegation to Russia in hopes of buying cheap crude.

On the 6th, Sri Lankan President Rajapaksa said on social media that he had asked Russian President Vladimir Putin for help and asked for "credit support to import fuel."

The United Nations estimates that about 80 percent of Sri Lankan dieters are dieting to cope with food shortages and record inflation.

Sri Lanka was the first country this year to stop paying its foreign debt on July 8, under pressure from heavy food and fuel costs, and reluctantly declared a default in May. In recent days, the country's foreign exchange reserves have plunged to record lows, and the dollar used to pay for basic imports, including food, medicine, and fuel, has run out.

The United Nations World Food Programme (WFP) said on the 6th, "According to the "State of Food Security and Nutrition in the World" assessment report, faced with record food price inflation, soaring fuel costs, and commodity shortages, some 6.26 million Sri Lankans, the country's 30% of families, skip three meals."

70% of households report that they have reduced food consumption, from three meals a day to two. The number of children suffering from acute malnutrition is increasing as families switch to cheaper, less nutritious foods. Access to safe drinking water and household water is also decreasing, increasing the risk of water-borne diseases.

UNICEF has called for nearly half of Sri Lanka's children to need some form of humanitarian assistance. Even before the current crisis, Sri Lanka had the seventh-highest rate of child malnutrition in the world and the second-highest rate of wasting among children under 5 in South Asia.

How did Sri Lanka come to this?

The crux of the various economic problems Sri Lanka is currently encountering is the extreme lack of foreign exchange reserves. The trigger is the epidemic. The foreign exchange income from tourism has disappeared, and the foreign exchange reserves have plummeted by 80% within a year.

Tourism is one of the economic pillars of Sri Lanka. Every year, a large number of tourists from Europe, Southeast Asia, and other places come to visit. Before the epidemic, Sri Lanka's tourism accounted for more than 12% of the country's GDP, and tourism revenue accounted for 14% of the country's foreign exchange earnings. However, due to the impact of the epidemic, overseas tourists have dropped sharply, and Sri Lanka's tourism industry has suffered a heavy blow.

To make matters worse, under the conflict between Russia and Ukraine, international oil and gas prices have skyrocketed, which is another blow to Sri Lanka, which is already short of foreign exchange.

Sri Lanka's economic mismanagement is also one of the important reasons.

After the end of the civil war in 2009, Sri Lanka chose to focus more on the domestic market rather than forging sales in overseas markets. At the beginning of 2021, Sri Lanka was already experiencing a shortage of foreign exchange. At that time, to prevent the rapid outflow of foreign exchange, Sri Lanka announced a ban on the import of chemical fertilizers. As a result, agricultural harvests were greatly reduced, including tea, which could generate little foreign exchange income. The government had to spend more foreign exchange to import food, resulting in a further shortage of foreign exchange.