Sri Lanka’s prime minister says economy ‘completely collapsed’

Ranil Wickremesinghe’s comments came as the island was going through its worst crisis in recent times, although the Prime Minister did not cite any new developments.

Sri Lanka’s debt-ridden economy has “collapsed” after months of food, fuel and electricity shortages, the prime minister told lawmakers in comments that highlighted the country’s plight as it seeks help from international creditors.

Ranil Wickremesinghe told parliament that the South Asian country was facing a “much more serious situation” than just shortages and warned of a “possible plunge to the bottom”.

“Our economy has completely collapsed,” he said on Wednesday.

The crisis on the island of 22 million people is considered the worst in recent times, but Wickremesinghe did not cite any specific new developments.

An Indian worker walks past packages of essential medicines being sent to Sri Lanka as the country’s economic crisis continues.
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His comments seemed intended to emphasise to critics and opposition lawmakers that he had inherited a difficult task that could not be resolved quickly.

“He is very, very low on expectations,” said Anit Mukherjee, a researcher and economist at the Centre for Global Development in Washington.

Wickremesinghe’s remarks also sent a message to potential lenders. “A country of such strategic importance cannot be allowed to collapse,” Mukherjee said, noting that Sri Lanka is on one of the busiest sea routes in the world.

Sri Lanka’s economy is crumbling under the weight of heavy debts, loss of tourism revenue and other consequences of the pandemic, as well as rising commodity prices. As a result, the country is fast approaching bankruptcy and has almost no money to import petrol, milk, cooking gas and toilet paper.

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Lawmakers from the two main opposition parties are boycotting parliament this week in protest against Wickremesinghe, who just over a month ago became prime minister as well as finance minister, for not fulfilling his promises to rebuild the economy.

Wickremesinghe said Sri Lanka could not buy imported fuel because of a large debt owed to its oil corporation.

Ceylon Petroleum Corporation has a debt of $700 million, he told lawmakers. “As a result, no country or organisation in the world is willing to provide us fuel. They are not even willing to provide fuel for cash.”

The crisis has begun to take its toll on Sri Lanka’s middle class, which is estimated to make up between 15% and 20% of the country’s urban population. The middle class began to grow in the 1970s when the economy opened up to trade and investment. It has grown steadily since then.

Until recently, middle-class families tended to enjoy economic security. Now those who never had to think twice about fuel or food are struggling to cope with three meals a day.

“They have really been shaken more than ever in the last three decades,” said Bhavani Fonseka, a senior researcher at the Centre for Policy Alternatives in Colombo, Sri Lanka’s capital.

“If the middle class is struggling like this, imagine how much the more vulnerable are suffering,” Fonseka added.

The situation has reversed years of progress towards the relatively comfortable lifestyle sought by South Asians.

Government officials were given three months off every Friday to save on fuel costs and grow their own fruit and vegetables. The inflation rate for food, according to official figures, was 57%.

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Wickremesinghe took office after days of violent protests over the country’s economic crisis that forced his predecessor to resign. On Wednesday, he accused the previous government of failing to act in a timely manner on Sri Lanka’s dwindling foreign exchange reserves.

The foreign exchange crisis had led to a reduction in imports, leading to severe shortages, including medicines, and forcing people to stand in long queues to get basic necessities.

“If at least steps had been taken in the beginning to slow down the collapse of the economy, we would not be facing this difficult situation today. But we have missed that opportunity. Now we are seeing signs of a possible fall to the very bottom,” he said.

So far, Sri Lanka has been struggling to survive, mainly thanks to $4 billion in credit lines from neighbouring India. But Wickremesingh said India would not be able to keep Sri Lanka afloat for long.

It has also received pledges of between $300 million and $600 million from the World Bank to buy medicines and other basic necessities.

Drivers are queuing up to buy fuel outside a petrol station in Colombo amid widespread shortages amid the country’s economic crisis.

Sri Lanka has already announced that it is suspending repayment of the $7 billion external debt due this year, pending the outcome of negotiations with the International Monetary Fund on a bailout package. It must pay an average of $5 billion a year until 2026.

Wickremesinghe said IMF assistance now seems to be the only option for the country. Representatives of the agency are visiting Sri Lanka to discuss the idea. A staff-level agreement is likely to be reached by the end of July.

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“We have completed initial discussions and exchanged ideas on various sectors,” Wickremesig said.

He said representatives from the government’s financial and legal advisers on debt restructuring were also visiting the island, and a team from the US Treasury Department would arrive next week.

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