RAYMOND, Maine – Sri Lanka’s economy has been taking a severe toll for months, sparking growing concern for the island nation around the world. As the country moved ever closer to bankruptcy, the World Bank officially granted Sri Lanka $700 million in emergency financing. The funding will ease the immediate burden of Sri Lanka’s economic crisis and allow room for developing economic plans for the future.

Sri Lanka’s economic crisis

Sri Lanka’s economic crisis has steadily worsened as the country’s foreign currency reserves have been depleted. To make matters worse, commodity prices are rising exponentially and inflation remains on the rise. The economic crisis of 2022 officially marks the financial slowdown of works that Sri Lanka has experienced since its independence in 1948. Sri Lanka’s poverty rate could increase to 11.7% in 2022, from 10% in 2019. The number could worsen and reach at least 22% in 2023 as Sri Lanka’s economic crisis is officially underway.

The lack of foreign exchange reserves means that Sri Lanka cannot depend on its typical imported products as the country has no means of paying its international partners. Sri Lanka depends on imported goods to feed its citizens and to be able to provide necessary medicines. Missing supplies prevent Sri Lanka from doing both of these things, effectively starving Sri Lankan citizens and leaving them and devastating the country’s national health status. The few supplies Sri Lanka has are causing queues to build up in stores. The situation has become so serious that there are calls for increased agricultural production. While Sri Lanka has a strong agricultural community, with over 30% of Sri Lanka’s workforce in the agricultural sector, they cannot produce everything to sustain the country.

To make matters worse, Sri Lanka has officially defaulted on loan repayments. Its default prompted two of the world’s biggest credit rating agencies to announce that Sri Lanka’s loans were in default. Announcements from credit agencies will have a ripple effect on assistance, as default in payment causes foreign investors to lose confidence in a nation. Finding financial assistance will become more difficult until Sri Lanka can prove its fiscal responsibility.

World Bank funding

Sri Lankan Finance Minister Ali Sabry has sought financial assistance from several sources, including the World Bank, the International Monetary Fund (IMF) and the Asian Development Bank (ADB). The World Bank had an immediate response to Sri Lanka’s economic crisis by promising some financial assistance. He will negotiate an agreement with the Asian Development Bank to formulate financial assistance from all sides.

The World Bank issued this statement before announcing its official economic assistance to Sri Lanka: “We are currently reallocating resources from previously approved projects to assist the government with some essential medicines, temporary cash transfers for poor and vulnerable households, school meals for children from vulnerable families and support for farmers and small businesses.

The reallocation of loans gives Sri Lanka the space it needs to focus on developing a long-term plan to weather the financial crisis. The $700 million in loans will help short-term financial goals materialize. Much of the $700 million will be used to replenish foreign currency reserves to bring in emergency supplies. Sri Lanka depends on emergency aid from its allies and neighboring countries for supplies. Yet it depends on the selflessness and financial strength of those same allies for emergency funding.

What will end the crisis?

While the World Bank’s financial assistance is much appreciated, Sri Lanka’s economic crisis will not end solely based on the World Bank’s actions and assistance. Some of Sri Lanka’s problems have their roots in pre-COVID-19 pandemic policies and years of reliance on the tourism sector. The tourism sector brought in more than $5 billion in 2019 for the country. Unfortunately, once the pandemic hit Sri Lanka and the island shut down, the tourism industry fell to just over $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 trends.

China has invested heavily in Sri Lanka in the past and remains one of Sri Lanka’s largest investors. Sri Lanka has received billions of dollars through China’s “Belt and Road” initiative. The initiative involves building new ports, roads, railways and other forms of infrastructure or repairing old infrastructure across Asia. China’s investments and its declaration that it supports Sri Lanka’s loan restructuring will encourage other countries to follow suit. Any aid stemming from China’s statement will help Sri Lanka find financial aid or restructure loans the island nation has elsewhere.

Sri Lanka’s economic crisis is multi-layered, with no single solution or easy solution. Instead, it will take months and months of restructuring and development planning to find a way out of the country’s problems. International attention and assistance from the World Bank, including loan modifications and attempts to help restructure loans, could see the country take its first steps towards ending Sri Lanka’s economic crisis.

–Clara Mulvihill
Photo: Flickr

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