RAYMOND, Maine — Sri Lanka’s economy has been undergoing severe devastation for months, causing growing concern for the island nation worldwide. As the country drew nearer and nearer to bankruptcy, The World Bank officially granted Sri Lanka $700 million in emergency funding. The funding will ease the immediate burden of Sri Lanka’s economic crisis and allow for room to develop economic plans for the future.
Sri Lanka’s Economic Crisis
Sri Lanka’s economic crisis has been growing steadily as the country’s foreign currency reserves deplete. To make matters worse, prices for essential commodities are increasing exponentially, and inflation remains on the rise. The 2022 economic crisis officially marks the works financial downturn Sri Lanka has seen since its independence in 1948. Sri Lanka’s poverty rate could increase to 11.7% in 2022, compared to 10% in 2019. The number could worsen and reach at least 22% in 2023 since Sri Lanka’s economic crisis is officially underway.
The lack of foreign reserves means Sri Lanka cannot depend on its typical imported goods as the country has no method to pay its international partners. Sri Lanka depends on imported goods for keeping its citizens fed and to be able to provide necessary medication. The lacking reserves are leaving Sri Lanka unable to do both those things, effectively starving Sri Lanka’s citizens and leaving them and devastating the country’s national health status. The few supplies Sri Lanka does have are causing lines to pile up in stores. The situation has become so dire that there are calls for increasing agricultural production. While Sri Lanka has a strong farming community, with more than 30% of Sri Lanka’s labor force in the agricultural sector, they cannot produce everything to sustain the country.
To make matters worse, Sri Lanka has officially defaulted on loan payments. Its defaulting caused two of the largest credit rating agencies in the world to announce that Sri Lanka’s loans are defaulting. The credit agencies’ announcements will have a ripple effect on assistance, as loan defaulting causes foreign investors to lose confidence in a nation. Finding financial aid will grow more difficult until Sri Lanka can prove its fiscal responsibility.
World Bank Funding
Sri Lanka’s Finance Minister Ali Sabry has sought financial assistance from multiple sources, notably The World Bank, the International Monetary Fund (IMF) and the Asian Development Bank (ADB). The World Bank has had an immediate response to Sri Lanka’s economic crisis by promising financial assistance of some sort. It will navigate a deal with the Asian Development Bank to formulate financial aid from all sides.
The World Bank released this statement before it announced its official economic aid to Sri Lanka: “We are currently repurposing resources from previously approved projects to help the government with some essential medicines, temporary cash transfers for poor and vulnerable households, school meals for children of vulnerable families and support for farmers and small businesses.”
The repurposing of loans grants Sri Lanka the space it needs to focus on developing a long-term plan for navigating the financial crisis. The $700 million in loans will help the short-term financial goals come to fruition. Much of the $700 million will replenish foreign currency reserves to bring in emergency supplies. Sri Lanka is dependent on emergency assistance from allies and nearby countries for supplies. Still, it is dependent on these same allies’ altruism and financial strength for emergency funding.
What Will Cause the Crisis to End?
While the financial assistance from the World Bank is much appreciated, Sri Lanka’s economic crisis will not end depending solely on the World Bank’s actions and aid. Some of Sri Lanka’s troubles root in pre-COVID-19 pandemic policies and years of dependence on the tourism sector. The tourism sector grossed more than $5 billion in 2019 for the country. Unfortunately, once the pandemic reached Sri Lanka and the island shut down, the tourism industry dropped to slightly more than $1 billion in 2020, VOA reports. Due to its heavy reliance on tourism, Sri Lanka desperately needs to diversify its economy and break away from its pre-pandemic tendencies.
China has invested heavily in Sri Lanka in the past and remains one of Sri Lanka’s most prominent investors. Sri Lanka has received billions of dollars due to China’s “Belt and Road Initiative.” The initiative is to construct new ports, roads, railways and other infrastructure forms or fix old infrastructure throughout Asia. China’s investments and its declaration that it supports the restructuring of Sri Lanka’s loans will encourage other countries to follow suit. Any aid that stems from China’s declaration will help Sri Lanka find financial assistance or restructure loans the island nation has elsewhere.
Sri Lanka’s economic crisis is multi-layered, with no single solution or easy fix. Instead, it will take months upon months of restructuring and planning development to find a way out of the country’s troubles. The international attention and assistance from the World Bank, including the alterations to loans and attempts to help restructure loans, could bring the country its first steps towards ending Sri Lanka’s economic crisis.
– Clara Mulvihill
Photo: Flickr