Citizens hold an anti-government protest calling for the resignation of President Gotabaya Rajapaksa near the presidential office in Colombo, Sri Lanka’s largest city, on the 17th. Colombo = AFP Yonhap News
An analysis showed that changes in the world economy caused by Russia’s invasion of Ukraine had a decisive effect on Sri Lanka’s declaration of default. The diagnosis is the result of adding external effects such as war and inflation to accumulated internal factors such as a decrease in tourists due to a prolonged pandemic.
The Washington Post reported on the 17th (local time) that Sri Lanka’s default declaration is intended to reduce dollar reserves for debt repayment in order to boost fuel and food imports. In fact, according to data from the Central Bank of Sri Lanka, the domestic market price of diesel has doubled in the past six months. Prices of rice and wheat more than doubled. Dissatisfaction with rising prices has sparked unrest, with Sri Lankans calling for the resignation of President Gotabaya Rajapaksa.
Soaring fuel and food prices around the world caused by Russia’s war on Ukraine has turned Sri Lanka’s accumulated economic crisis into a catastrophe. Even before the decrease in tourists due to the pandemic, Sri Lanka has been suffering from insolvency due to excessive government spending on external debt and inappropriate tax cut policies. It is analyzed that the price of daily necessities skyrocketed in the followingmath of the war, adding oil to the fire.
In particular, Sri Lanka, which is highly dependent on petroleum fuel, was hit directly by the increase in international oil prices following the war. Oil is known to account for 40% of Sri Lanka’s total power generation. It is a country where transportation and industry are paralyzed when imports decrease due to a rise in oil prices. Sri Lanka’s finance minister, Ali Sabri, also announced the default, saying: “The unfortunate situation in Ukraine has almost doubled the price of our imports of essential fuels. ” he exclaimed.
The same is true of food. The Food and Agriculture Organization of the United Nations (FAO) said last week that global food prices rose to the highest level since 1990. The FAO analyzed that the surge in food prices was largely due to the war in Ukraine, a major wheat-producing country. The FAO predicted that “a major grain price increase would impose special costs on global consumers, especially poor countries”, which has become a reality in Sri Lanka.
Alan Keenan, an analyst at the International Crisis Group (ICG), an international conflict research organization, said: “Sri Lanka would have been at risk if it wasn’t for the Ukraine war, but the war is making the crisis more complicated. “Even if we get a bailout, we choose to buy food and fuel,” he told The Post.
Sri Lanka, which declared a default, will begin negotiations with the IMF for a bailout on the 19th. A delegation from Sri Lanka, led by Finance Minister Ali Sabri, headed to Washington, D.C., where the IMF headquarters is located, on the 17th. Sri Lanka’s debt due this year is $7 billion, and it has to pay off $1 billion in July. Currently, Sri Lanka’s foreign exchange reserves are said to be only 2.3 billion dollars. The Wall Street Journal (WSJ) in the US diagnosed on the same day that “there is a growing concern regarding the national wealth of developing countries such as Pakistan, Egypt and Argentina following Sri Lanka in the followingmath of the invasion of Ukraine.”
Kim Cheong-hwan reporter chk@hankookilbo.com
