Colombo: Almost three years since terrorists blew up hotels along Colombo’s beaches and two years since Covid-19 shut down international travel, tourists have begun returning to Sri Lanka, providing sorely needed foreign exchange. The country’s stockmarket has been bounding along, up by more than 80% in 2021, trailing only commodity-rich Mongolia among global bourses. Corporate profits have been strong, too. GDP growth last year was somewhere between 3.5% and 5%. This suggests a thriving economy. Yet alarm bells are clanging.
Encouraging though the renewed tourist arrivals may be, they are still barely a fifth of the pre-pandemic peak. Exports grew strongly in the fourth quarter of 2021 but are still too meagre to prevent a looming financial crisis. Years of heavy foreign debt and current- account deficits have taken a toll. Foreign reserves have collapsed. Supplies of oil, cooking gas, milk, wheat and medicine are running short. A rapidly depreciating currency has helped the country’s exporters. But it has made servicing foreign-denominated debt more costly and has stoked inflation, which jumped during 2021 to 12% and appears to be accelerating.
So Sri Lanka finds itself looking down the barrel of a gun. On January 18th $500m in foreign-currency-denominated debt will come due. Another $5.4bn in principal and interest will need to be paid by the end of the year. Similar payments are required for years to come. That has provoked a series of complex financial manoeuvres. In January the central bank disclosed that it had sold off half the country’s $382m of gold reserves.
A bigger problem is that Sri Lanka’s increasingly desperate deals do not address the real reason for its current travails. After Gotabaya Rajapaksa was elected president in 2019, he abandoned the fiscal and monetary-policy conditions imposed by the IMF three years earlier after another financial upheaval. If they approach the IMF to arrange a restructuring of the country’s finances, interest rates and taxes would probably rise, government spending decline, and bondholders would have to take losses. In exchange there would be stability and new funds. But Rajapaksa’s government has vocally opposed IMF intervention, calling it an infringement of sovereignty. The alternative is default and the risk of higher inflation, fewer imported goods and an end to the current recovery.
