In Sri Lanka, overall rate of inflation for February 2022, as measured by National Consumer Price Index (NCPI), stood at 17.5 percent – the highest since 2015.
Mounting debt, foreign exchange squeeze and runaway inflation, Sri Lanka’s economy is in a hole but it’s not the first time. The country has long been identified as an exception in South Asia because of its social development. The country’s high dependency on imports for essential commodities is what is fuelling protests from its people along with the pandemic’s worst effect on its economy, which is primarily run on tourism.
Additionally, the Rajapaksa government’s decision to ban all chemical fertilizers last year to make agriculture 100 percent organic severely hit the country’s farm production, especially in rice and sugar production forcing the reversal of this decision.
A worsening crisis mutes the impact of disjointed financial lifelines, including a $1.5 billion currency swap from China in December and rice and diesel shipments from India. The IMF notes that policies required to reduce debt to sustainable levels are neither economically nor politically feasible.
Hence, Sri Lanka’s $1 billion bond maturing in July trades at 67 cents on the U.S. dollar, compared to about 74 cents at the start of February. Haircuts will stretch from China to Wall Street, where market borrowings accounted for 47% of Sri Lanka’s foreign government debt as of April last year.
Moreover, According to government data, FDI stood at $548 million in 2020 compared to $793 million and $1.6 billion in 2019 and 2018, respectively. If one looks at the drop in FDI in Srilanka and how foreign direct investment or any investment isn’t coming into the country, one can draw parallels with Andhra Pradesh from May 2019.
Gradually, investments and major companies shifted out of AP, including legacy firms like Amararaja Group and other big-ticket foreign investments like Lulu Group, HCL, Hero, etc. From pouring all the money into free welfare schemes, the Jagan-led government has almost bankrupted the state and AP is facing a several financial deficit and lack of income.
From increase in every basic charge from electricity to fuel to LPG to prices of essential commodities and other items, Andhra Pradesh is not far away from going into financial emergency within a span of few months. How and who will save the state is yet to be seen, despite having a government that came to power over a thumping majority!
