Krishan Francis | Associated Press
COLOMBO, Sri Lanka – Sri Lanka’s debt-laden economy has “collapsed” after months of food, fuel and electricity shortages, the prime minister told lawmakers Wednesday in comments that highlighted the country’s plight as it seeks help from international creditors.
Ranil Wickremesinghe told parliament that the South Asian country was facing a “much more serious situation” than just a shortage and warned of “a possible sinking to the bottom”.
“Our economy has completely collapsed,” he said.
The crisis on the island of 22 million is considered the worst in recent memory, but Wickremesinghe did not cite any specific new developments. His comments seemed intended to emphasize to critics and opposition legislators that he had inherited a difficult task that could not be solved quickly.
“He’s very, very low expectations,” said Anit Mukherjee, a research fellow and economist at the Center for Global Development in Washington.
Wickremesinghe’s remarks also sent a message to potential lenders: “You can’t let a country of such strategic importance collapse,” Mukherjee said, noting that Sri Lanka is on one of the busiest shipping lanes in the world.
Sri Lanka’s economy is collapsing under the weight of heavy debt, loss of tourism revenue and other impacts from the pandemic, as well as rising commodity prices. As a result, the country is rapidly approaching bankruptcy, with little to no money to import gasoline, milk, cooking gas and toilet paper.
Lawmakers from the two main opposition parties are boycotting parliament this week in protest against Wickremesinghe, who became prime minister just over a month ago and also finance minister, for failing to deliver on his promises to change the economy.
Wickremesinghe said Sri Lanka was unable to purchase imported fuel because of the large debt owed to its oil corporation.
Ceylon Petroleum Corporation owes $700 million, he told lawmakers. “As a result, no country or organization in the world is willing to provide us with fuel. They don’t even want to provide fuel for cash.”
The crisis has begun to take its toll on Sri Lanka’s middle class, which is estimated to be between 15% and 20% of the country’s urban population. The middle class began to grow in the 1970s as the economy opened up to trade and investment. Since then, it has grown steadily.
Until recently, middle-class families tended to enjoy economic security. Now, those who have never had to think twice about fuel or food are struggling with three meals a day.
“They were really shaken up like never before in three decades,” said Bhavani Fonseca, senior fellow at the Center for Policy Alternatives in Colombo, Sri Lanka’s capital.
“If the middle class is struggling like this, imagine how much the more vulnerable suffer,” Fonseca added.
The situation reversed decades of progress towards the relatively comfortable lifestyle that South Asians aspired to.
Government officials were given three months off every Friday to save on fuel and grow their own fruits and vegetables. The inflation rate for food, according to official figures, is 57%.
Wickremesinghe took office after days of violent protests over the country’s economic crisis, which forced his predecessor to step down. On Wednesday, he accused the previous government of not taking timely action in connection with the reduction of Sri Lanka’s foreign exchange reserves.
The foreign exchange crisis has reduced imports, leading to severe shortages, including medicines, and forcing people to stand in long lines to get basic necessities.
“If at the beginning there were at least steps taken to slow down the collapse of the economy, today we would not be faced with this difficult situation. But we missed this opportunity. Now we see signs of a possible fall to the very bottom, ”he said.
So far, Sri Lanka has struggled to survive, largely thanks to $4 billion in credit lines from neighboring India. But Wickremesingh said that India would not be able to keep Sri Lanka afloat for long.
It has also received contributions from the World Bank ranging from $300 million to $600 million to purchase medicines and other essentials.
Sri Lanka has already announced that it is suspending the repayment of $7 billion of external debt owed this year, pending the outcome of negotiations with the International Monetary Fund on a bailout package. It has to pay an average of $5 billion a year until 2026.
Wickremesinghe said IMF assistance now seems the only option for the country. Agency representatives are visiting Sri Lanka to discuss the idea. An agreement at the staff level is likely to be reached by the end of July.
“We completed the initial discussions and exchanged ideas across the various sectors,” Wickremesig said.
According to him, representatives of the government’s financial and legal advisers on debt restructuring issues are also visiting the island, and a team from the US Treasury will arrive next week.
Krutika Pati and Bharata Mallavarachi in Colombo and Paul Wiseman in Washington contributed to this report.