EXPLAINER: What happened and what’s next in Sri Lanka | business news

COLOMBO, Sri Lanka (AP) — Sri Lanka’s president, who had announced he would resign Wednesday, has fled the country after months of unrest that culminated in protesters converging on the presidential palace. This is what is happening in Sri Lanka:

— The country plunges into bankruptcy

— Daily essentials, including food and medicine, are in short supply

— Political corruption has deepened mistrust in government

Political cartoons about world leaders

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— The government’s double whammy and economic instability is further complicating the recovery

Sri Lanka’s prime minister, who has said he will step down after a new government is installed, says the island nation’s debt-ridden economy has “collapsed” as it runs out of money to pay for food, fuel and medicine. He has been relying on help from neighboring India, China and the International Monetary Fund.

Outgoing Prime Minister Ranil Wickremesinghe, who took office in May, was emphasizing the monumental task he faces in turning around an economy he said is headed for “bottom out.”

Sri Lankans are skipping meals as they endure shortages, queuing for hours to try to buy scarce fuel and cooking gas. It is a harsh reality for a country whose economy had been growing rapidly, with a growing and affluent middle class, until the latest crisis deepened.

This is the situation in Sri Lanka:

HOW SERIOUS IS THIS CRISIS?

The government owes $51 billion and cannot pay the interest on its loans, let alone put a dent in the amount borrowed. Tourism, a major engine of economic growth, has stalled due to the pandemic and security concerns after the terrorist attacks in 2019. And its currency has plunged by 80%, making imports more expensive and worsening inflation that It is already out of control, with food costs rising 57%, according to official data.

The Finance Ministry says that Sri Lanka has only $25 million in usable foreign reserves. It needs $6 billion to stay afloat for the next six months.

The result is a country on the verge of bankruptcy, with hardly any money to import gasoline, milk, cooking gas, medicines and even toilet paper.

WHAT ROLE DID POLITICS PLAY?

Economists say the crisis is due to internal factors, such as years of mismanagement and corruption.

Much of the public anger has focused on President Gotabaya Rajapaksa and his brother, former Prime Minister Mahinda Rajapaksa. The latter resigned after weeks of anti-government protests that eventually turned violent.

In April 2021, Rajapaksa suddenly banned imports of chemical fertilizers. The push for organic farming caught farmers by surprise and decimated staple rice crops, driving up prices.

The government needed to boost its revenues as foreign debt soared for large and questionable infrastructure projects, but instead Rajapaksa pushed through the largest tax cuts in Sri Lankan history. Creditors downgraded Sri Lanka’s ratings, preventing it from borrowing more money as its foreign exchange reserves sank.

HOW DOES IT AFFECT REAL PEOPLE?

Tropical Sri Lanka does not normally lack food, but people do go hungry. The UN World Food Program says nearly nine in 10 families skip meals or skimp to stretch their food, while 3 million receive emergency humanitarian aid.

The war in Ukraine has pushed up food and oil prices. Inflation was close to 40% and food prices rose almost 60% in May.

Doctors have taken to social media to try to obtain critical supplies of equipment and medicine. They also warned people to do anything to avoid getting sick or having accidents. An increasing number of Sri Lankans are seeking passports to go abroad in search of work. Government workers have been given an extra day off for three months to give them time to grow their own food. In short, people are suffering and desperate for things to get better.

WHAT IS THE GOVERNMENT DOING ABOUT IT?

The latter is Wickremesinghe’s sixth term as prime minister. His appointment was one of many moves to instill confidence in the government and get the economy back on track as protesters demanded an end to the Rajapaksa dynasty.

So far, Sri Lanka has been mumbling, supported mainly by $4 billion in credit lines from neighboring India. An Indian delegation was in the capital Colombo on June 23 to discuss more assistance, but Wickremesinghe warned that India should not be expected to keep Sri Lanka afloat for long.

In early June, the United Nations launched a global public appeal for assistance. So far, projected funding barely scratches the surface of the $6 billion the country needs to stay afloat for the next six months.

Wickremesinghe told The Associated Press in a June 12 interview that he would consider buying oil from Russia at deeper discounts to help the country through its crisis.

Some of the policies that contributed to the economic damage have since been reversed, including the 2019 tax cuts and last year’s chemical fertilizer import ban, but it will be time before the effects are apparent.

WHAT’S NEXT FOR SRI LANKA?

“Sri Lanka pins last hopes on IMF,” read a recent headline in the Colombo Times newspaper. The government is in talks with the IMF over a rescue plan and Wickremesinghe said on June 22 that he expected to have a preliminary agreement with the IMF by the end of July. But that also depends on his replacement and the installation of a new government.

Political corruption is also a problem; not only did it play a role in the squandering of the country’s wealth, but it also complicates any financial rescue for Sri Lanka. Sri Lankan leaders have agreed that lawmakers will elect a new president on July 20, but struggled on Tuesday to decide on the composition of a new government.

Anit Mukherjee, an economist and policy fellow at the Center for Global Development in Washington, said any assistance from the IMF or World Bank must have strict conditions to ensure the aid is not mismanaged.

Still, Mukherjee noted that Sri Lanka is on one of the world’s busiest shipping lanes, so letting a country of such strategic importance collapse is not an option.

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