Much like the COVID pandemic, the economic and financial crisis has dragged on with no resolution to the problem in sight.
Is the new normal one of severe shortages of essential foodstuffs, medicines, petrol, diesel, power cuts and water shortages?
The root of the problem is the lack of foreign exchange even for essential imports. Foreign exchange reserves have reached their lowest level.
Although foreign exchange reserves at the end of January were estimated at US$2.3 billion, usable reserves are minimal. Official reserves appear to include currency swaps which are not available for imports.
Lifelines have been given by India to import essential food, medicine and fuel. China granted a loan in Yuan to buy raw materials for the industry. India and China have also granted currency swaps to increase reserves.
Food of Pakistan
The government has even secured a $250 million line of credit to buy food in Pakistan, which is experiencing serious economic difficulties, and has turned to the IMF to resolve the country’s financial difficulties.
This aid is mutually beneficial: Sri Lanka obtains much-needed food, Pakistan sells its surplus food for deferred payment.
These lines of credit are essential. They meet basic needs. However, they are insufficient to meet the country’s currency needs. Furthermore, they add to the country’s already high debt burden and debt repayment obligations, as these credit facilities must be repaid in due time.
It is not yet known whether China will grant the request to reschedule our loan repayments. Such a rescheduling would ease the pressure on repayment obligations. Perhaps the late response to this request is due to the conditions required by China.
What is the current financial situation? Financial analysts estimate usable reserves at less than US$500 million. Maybe as little as US$200 million, which isn’t even enough for a month’s worth of imports.
Such is the desperate situation in which the country finds itself, unable to import basic needs. The inability of the Petroleum Corporation (CPC) to import fuel has serious consequences. The economy could shut down.
In this severe shortage of foreign currency, we have to depend on lines of credit provided by friendly countries. These may also run out soon. Further injections of credit may soon be needed. Will they be coming?
In addition to the country’s basic import needs, debt repayment obligations amount to about $5 billion this year. How will they be satisfied?
The balance of payments deficit is increasing due to the worsening trade deficit, the shortfall in service income and net capital outflows. The growing balance of payments deficit is depleting reserves.
Despite this desperate situation, there is no policy to resolve the crisis. The only “remedy” is more control over the release of foreign exchange for essential imports.
We are told that we will not ask for help from the IMF because there are “in-house” solutions. What is that? Are they aggravating the crisis?
The consequences of inaction are shortages of essential foods, soaring prices, lack of medicines, uncertainty of electricity supply and water cuts. A gasoline shortage is imminent.
Further shortages could lead the life of the nation to less economic activity and the closure of businesses and services. Industries are experiencing delays and shortages of raw materials critical to production.
Auto parts traders warn of a shortage of spare parts that will affect transportation or, as they put it, bring the country’s transportation and economy to a screeching halt: “Rata kotauda”.
Despite this serious situation, there are no significant political measures to resolve the crisis. In fact, current policies are making the situation worse.
The artificially low exchange rate deprives the country of foreign currency. The upward trend in remittances through the middle of last year reversed due to the official rate about fifty rupees below the market rate and strong demand for foreign currency due to controls exchange rates.
Remittances fell from an expected US$8.5 billion to just US$6 billion. This decrease of about US$2.5 billion would have contributed significantly to reducing the balance of payments deficit and would have reduced the depletion of foreign exchange reserves. Indications are that the country will lose about US$4 billion in remittances this year.
The trade deficit is widening despite import restrictions and export growth. There is little prospect of a balance of payments surplus due to the Central Bank administered exchange rate.
There is a massive repayment of foreign debt this year.
At the end of the second month of the year no light is visible at the end of the tunnel. In fact, the tunnel becomes darker and longer. And there are no silver linings in dark clouds.
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