Too many debts, too few tourists: Sri Lanka’s economy is sinking

Sri Lanka’s debt-laden economy has “collapsed” after months of shortages of food, fuel and electricity, its prime minister told lawmakers Wednesday, in comments underscoring the country’s dire situation as it seeks help from international lenders.

Prime Minister Ranil Wickremesinghe told Parliament the South Asian country is “facing a far more serious situation beyond the mere shortages of fuel, gas, electricity, and food. Our economy has completely collapsed.”

While Sri Lanka’s crisis is considered its worst in recent memory, Mr. Wickremesinghe’s assertion that the economy has collapsed did not cite any specific new developments. It appeared intended to emphasize to his critics and opposition lawmakers that he has inherited a difficult task that can’t be fixed quickly, as the economy founders under the weight of heavy debts, lost tourism revenue and other impacts from the pandemic, as well as surging costs for commodities.

Lawmakers of the country’s two main opposition parties are boycotting Parliament this week to protest against Mr. Wickremesinghe, who became prime minister just over a month ago and is also finance minister, for not having delivered on his pledges to turn the economy around.

Mr. Wickremesinghe said Sri Lanka is unable to purchase imported fuel, even for cash, due to heavy debt owed by its petroleum corporation.

“Currently, the Ceylon Petroleum Corporation is $700 million in debt,” he told lawmakers. “As a result, no country or organization in the world is willing to provide fuel to us. They are even reluctant to provide fuel for cash.”

Mr. Wickremesinghe took office after days of protests over the country’s economic crisis forced his predecessor to step down. In his comments Wednesday, he blamed the previous government for failing to act in time as Sri Lanka’s foreign reserves dwindled.

The Monitor covered Sri Lanka earlier in June and highlighted a protest-centered grassroots initiative that transcends ethnic barriers:

Years of mismanagement have resulted in severe shortages of essentials like fuel and cooking gas, as well as daily power cuts and surging prices. ... In a country that’s long struggled with ethnic and religious conflict, Gota Go Gama [a makeshift village in Colombo] isn’t just a protest hub, but a rare glimpse into what a unified Sri Lanka could look like. Within the sprawling tent city, generations of mistrust between groups such as the Sinhalese Buddhists, Hindu Tamils, and Muslims appear to give way to fellowship, tolerance, and learning.

Many Sri Lankans have a desire to work together, even when faced with a foreign currency crisis that has crimped imports, creating severe shortages and forcing people to stand in long lines to obtain basic needs.

“If steps had at least been taken to slow down the collapse of the economy at the beginning, we would not be facing this difficult situation today. But we lost out on this opportunity. We are now seeing signs of a possible fall to rock bottom,” Prime Minister Wickremesinghe said.

So far, Sri Lanka has been muddling through, mainly supported by $4 billion in credit lines from neighboring India. But Mr. Wickremesinghe said India would not be able to keep Sri Lanka afloat for long.

It also has received pledges of $300 million-$600 million from the World Bank to buy medicine and other essential items.

Sri Lanka has already announced that it is suspending repayment of $7 billion in foreign debt due this year, pending the outcome of negotiations with the International Monetary Fund on a rescue package. It must pay $5 billion on average annually until 2026.

Mr. Wickremesinghe said IMF assistance seems to be the country’s only option now. Officials from the agency are visiting Sri Lanka to discuss a rescue package. A staff-level agreement is likely to be reached by the end of July.

“We have concluded the initial discussions and we have exchanged ideas on various sectors such as public finance, finance, debt sustainability, stability of the banking sector and the social security network,” Mr. Wickremesinghe said.

Representatives of financial and legal advisers to the government on debt restructuring, Lazard and Clifford Chance, are also visiting the island and a team from the U.S. Treasury will arrive next week, he said.