Sri Lanka | Rampant corruption and unbridled indebtedness drove the Sri Lankan economy into great disarray – Graphics show the extent of the crisis

Over-indebted Sri Lanka’s economy is on the verge of collapse and the people are furious.

The main causes of the economic crisis are widespread corruption and uncontrolled indebtedness. Now the state’s funds have run out and it is no longer able to acquire essential goods for people such as fuel, food and medicine

Since 2019, public expenditure in Sri Lanka has been on average more than ten percent higher than income. Attempts were also made to artificially breathe the economy with tax cuts, which only increased indebtedness.

The coronavirus pandemic has increased the economic distress even more, because tourism, which is very important to the country, decreased sharply.

In May Sri Lanka went into default because it defaulted on its payment obligations.

Foreign debt has grown to more than 50 billion dollars. According to the International Monetary Fund (IMF), indebtedness is unmanageable because incomes have also been depleted. In May, the foreign exchange reserve has shrunk to 1.9 billion dollars.

Sri Lanka has no chance of getting a loan from the market on tolerable terms. In the market, the yield requirement for the government’s ten-year bond, i.e. the interest rate, has risen to nearly 30 percent.

This means that Sri Lanka is effectively excluded from international financial markets. However, Sri Lanka has received loans from some countries such as China, India and Japan, as well as from the World Bank and the IMF.

The roadside was full of vehicles queuing for fuel in Colombo on Thursday. Due to the fuel shortage, there are no traffic jams. Picture: Emilia Anundi / HS

Citizens the root cause of the rage is relatively simple: there is a shortage of all essential goods because people cannot afford to buy them. The inflation rate has accelerated to more than 50 percent.

Heavy indebtedness has also led to capital flight. Because of that, the value of the Sri Lankan currency has collapsed. The central bank has had to use its foreign exchange reserves, i.e. its foreign investments, in an attempt to prevent the collapse of the currency, but has not succeeded in doing so.

Foreign exchange reserves the strong contraction, the noticeable increase in indebtedness and the very rapid acceleration of inflation have led to chaos, from which recovery will probably take a very long time.

“Sri Lanka is going through a serious economic crisis. The economy is expected to contract significantly in 2022, when inflation is strong and accelerating. The critically low level of foreign exchange reserves has hindered the import of essential goods,” the IMF estimated at the end of June.

The goal is to create a comprehensive economic reform program that will correct economic imbalances, restore debt sustainability and consider ways to improve the sources of economic growth.