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In the gigantic economic chaos of Sri Lanka, the great link of China -by Ecork

Sri Lanka has said it will default on its $51 billion foreign debt. (case)

Colombo:

Sri Lanka is experiencing its worst economic crisis since its independence from Britain in 1948. Months of power cuts and severe shortages of food, fuel and medicine have angered the public, as massive protests calling for the government’s resignation turned violent this week.

AFP reviews the origins of the mounting economic disaster in the South Asian island nation:

– white elephants –

Sri Lanka has spent large sums on questionable infrastructure projects backed by Chinese loans on top of its already unsustainable debt.

In the southern region of Hambantota, a huge deep-sea port bled money from the moment it began operations, losing $300 million in six years. Nearby is another China-backed exaggeration: a massive convention center, largely unused since it opened, and a $200 million airport that was once unable to make enough money to pay the electric bill.

The powerful Rajapaksa family, which has dominated politics in Sri Lanka for most of the past two decades, has pushed the projects to take place.

– Unsustainable tax cuts –

President Mahinda Rajapaksa was voted to remove office in 2015, due in part to the backlash against his government’s infrastructure crackdown, which has been mired in graft lawsuits.

He was succeeded by his younger brother, Mr. Gotabaya four years later, promising economic relief and crackdown on terrorism after the deadly Easter attacks on the island in 2019.

Days after taking office, Mr. Gotabaya appointed Mahinda Rajapaksa as Prime Minister and unveiled the largest tax cuts in Sri Lanka’s history, exacerbating chronic budget deficits.

And rating agencies quickly lowered the country’s credit rating out of concern that public debt was spiraling out of control, making it difficult for the government to obtain new loans.

– pandemic –

The tax cuts were in astonishingly bad timing: Just a few months later, the coronavirus began spreading around the world.

International tourist arrivals have fallen to zero, and remittances from Sri Lankans working abroad – two economic pillars the government relies on to service its debts – have dried up.

Without these sources of external cash, the Rajapaksa administration began to use its reserves of foreign exchange to repay loans.

– Fertilizer ban –

Sri Lanka was soon burning its foreign exchange reserves at an alarming rate, leading the authorities in 2021 to ban several imports including – crucially – the fertilizers and agrochemicals farmers need to grow their crops.

The government sold this policy as part of Sri Lanka’s bid to become the world’s first fully organic farming country, but the effects were disastrous.

Farmers have left up to a third of the country’s agricultural fields idle, and the resulting decline in yields has hurt tea production – a vital source of exports.

This policy was eventually abandoned at the end of 2021 after protests by agricultural workers and a massive rise in food prices.

– Shortage and power outages –

By late 2021, Sri Lanka’s reserves had shrunk to $2.7 billion, down from $7.5 billion when Rajapaksa took office two years earlier.

Traders began struggling to obtain foreign currency to purchase imported goods. Staples like rice, lentils, sugar and milk powder started disappearing from the shelves, forcing supermarkets to ration them. Then gas stations started running out of gasoline and kerosene, and utilities couldn’t buy enough oil to meet electricity demand.

Long queues now form every day across the country with people waiting for hours to buy meager supplies of fuel, while blackouts leave much of the capital, Colombo, in the dark every night.

– Debt and default –

Gotabaya Rajapaksa appointed a new central bank chief in April, who soon announced that Sri Lanka would default on its $51 billion foreign debt to save money for essential imports.

The move failed to support Sri Lanka’s deteriorating financial conditions, and it only had about $50 million in usable foreign currency at the beginning of May. The country is now in negotiations to rescue the International Monetary Fund.

Mahinda Rajapaksa, the prime minister, resigned on Monday in a bid to calm the public after weeks of protests over government mismanagement.

But central bank chief Nandalal Wierasinghe said on Wednesday that unless a new administration takes over soon, the country faces imminent economic collapse.

“No one will be able to save Sri Lanka at that point,” he said.

(Except for the headline, this story has not been edited by the NDTV crew and is published from a syndicated feed.)

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