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Sri Lanka Bankruptcy-

Sri Lanka bankruptcy is due to the financial crisis in the country. Prime Minister Ranil Wickremesinghe said that the country is suffering from the worst financial crisis. Millions of people are struggling to buy food, medicine and fuel. 

The government imposed 7 and half hour daily electricity cuts in the country as the supply of fuel is not sufficient. Public offices are ordered to use less electricity and work without the use of air-conditioners. It is the longest power cut after 26 years in the nation.

The country is also facing drought, which reduces the production of power through hydroelectric dams. Vehicles are standing in a queue outside petrol stations.

sri lanka bankruptcy

Economic Emergency in Sri Lanka

Sri Lankan bankruptcy was already predicted. The inflation has increased 15% from previous years. President Gotabaya Rajapaksa had declared an economic emergency under Public Security ordinance on 30 August, 2021 to curb the hike in food prices. 

The island country was stuck in a debt trap a few years ago. In 2017, Sri Lanka gave its Hambantota port to China on lease for 99 years as it failed to meet the expenses. The Sri Lankan government also closed its high commissions in Abuja (Capital of Nigeria), Nicosia (Capital of Cyprus) to conserve the country’s forex reserves.

Sri lanka bankruptcy - Hambantota Port

Some opposition leaders of Sri Lanka and some intellectuals are saying that the country is on the verge of bankruptcy; however, the Rajapaksa government was continuously denying it.

What happens when a country goes bankrupt? 

In practical terms, a country is never bankrupt, it is the government which goes bankrupt. When a country defaults on loans then it can take loans from world institutions like the IMF(International Monetary Fund), World Bank or can take loans from friendly nations. Many countries were declared defaulters in the past. These countries were; 

1998- Russia

2001- Argentina

2008- Iceland

2012- Greece

 2008- Ecuador 

What are the reasons for the Sri Lanka bankruptcy?

a) The main reason for the crisis in Sri Lanka is falling Forex reserves. At the end of 2019, the forex reserve of Sri Lanka was $7.6 billion. But now Sri Lanka’s Forex Reserve is only 1.6 billion dollars. The main source of earning Forex Reserve for the nation is tourism. The tourism sector contributed about 10% to the national GDP. In 2019, this sector was hit by Covid-19 pandemic.

b) In April, 2019 the newly elected government led by Rajapaksa announced a cut in VAT (Value Added Tax) so that domestic consumption rose and gave a boost to the economy but due to covid-19 pandemic spending of people decreased a lot. As a result, there was a sharp fall in the earnings of the government.

Why are the Forex Reserves of Sri Lanka falling?

  • The Ukraine-Russia war proved a disaster for Sri Lanka as the war has restricted tourists from Russia to this Island nation.
  • Sri Lanka is the largest exporter of tea to Russia, but due to the Ukraine Russia war it can not export tea to Russia.
  • In April, 2019 the government banned the use of fertilizers in agriculture in order to make Sri Lanka the world’s first fully organic country. But this decision adversely affected the production of crops in the country, especially tea. However, the government later on took a u-turn on this decision.
  • A surge in prices of crude oil also increased tensions in Sri Lanka. Prices for oil are above $100 per barrel.

From which neighboring countries Sri Lanka is getting help?

Sri Lanka is getting help from its neighbors in this hard time. The country is getting credit lines and currency swap facilities from India, China and Bangladesh

India proves its friendship with Sri Lanka in this tough time;

  • $500 million line of credit.
  • India signed a currency swap worth $400 million with Sri Lanka.
  • Indian Oil Corporation will send gas oil and jet fuel to Sri Lanka.
  • India also sent 40,000 tons of fuel to the country.

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