Sri Lanka’s Escalated Financial Crisis could Lead To Bankruptcy in 2022

While the pandemic contributed to Sri Lanka's escalated financial crisis, tax cuts and high government spending are also responsible. 

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Sri Lanka's financial crisis leads to bankruptcy in 2022
Image Source: The Economic Times.

The severe inflation in Sri Lanka’s economy has raised food prices to record levels, run the coffers dry, and sunk half a million people into poverty. This escalated financial crisis could lead Sri Lanka to bankruptcy in 2022. While the pandemic contributed to Sri Lanka’s escalated financial crisis, tax cuts and high government spending are also responsible. 

Issues that caused the escalated Sri Lankan financial crisis

The government printing money to pay off domestic loans and foreign bonds contributes to Sri Lanka’s escalated financial crisis. Heavy debt repayments to China and foreign exchange reserve being at the lowest causes concern. The pandemic has also led to severe losses in the tourism sector as it has lost over 200,000 employees. 

Jobs that demand physical presence, such as textile, construction, and manufacturing, have suffered massive job losses. 

With an estimated $7.3 billion in foreign and domestic loans, the country’s available foreign currency reserves were just $1.6 billion in November. 

How is Sri Lanka’s escalated financial crisis leading to bankruptcy in 2022?

Sri Lanka was prosperous for five years in fighting poverty until the escalated financial crisis. Sri Lanka faces an economic and humanitarian crisis, with 500,000 people falling below the poverty line since the pandemic.

Families struggled to afford essential goods, and there was still no relief in sight with the military in charge. 

Young and educated Sri Lankans are ready to leave the country due to the escalated financial crisis. The financial crisis leading to bankruptcy in 2022 is similar to the early 1970s. The early 1970s saw drastic food shortages due to low production and import controls. 

Organic Farming leading Sri Lanka to Bankruptcy in 2022?

Economist Harsha de Silva warned the parliament that the foreign currency reserve would be -$437m by January of next year.

In May, president Gotabaya Rajapaksa banned all pesticides and fertilizers. The ban caused farmers to go organic without prior warning forcefully. Farmers in fear of loss refuse to cultivate crops that add to the existing food shortage in Sri Lanka. 

The government cannot afford fertilizer subsidies, and the cost of growing paddy is enormous. 

What measures are taken by Sri Lanka to deal with escalating financial crisis leading to bankruptcy in 2022?

Relief measures such as credit lines to import food, fuel, and medicines from allies like India, Bangladesh, and China are some form of temporary solutions. The currency exchange and loans help Sri Lanka to purchase petroleum from Oman. 

Nevertheless, these temporary loans have high-interest rates with repayments in a short period. The relief measures add to Sri Lanka’s escalating financial crisis leading to bankruptcy in 2022. 

According to Sri Lanka’s central bank, the food prices inflated from 17.5 percent to 22.1 percent in December. 

In Conclusion,

Sri Lanka must adopt drastic measures to combat the escalating financial crisis. To avoid going bankrupt in 2022, the Sri Lankan government must face harsh realities and make tough decisions for its citizens. 

Also Read – Sri Lanka and Bangladesh Can Benefit from Growing Trade Ties

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