Sri Lanka’s debt-laden economy has “collapsed” after months of shortages of food, fuel and electricity, the prime minister told lawmakers in comments that underscored the country’s dire situation as it seeks help from international lenders.
Ranil Wickremesinghe told parliament the South Asian nation faces “a far more serious situation“ than the shortages alone, and he warned of “a possible fall to rock bottom.”
“Our economy has completely collapsed,” he said on Wednesday.
The crisis on the island of 22 million is considered its worst in recent memory, but Wickremesinghe did not cite any specific new developments.
His comments appeared intended to emphasise to critics and opposition lawmakers that he has inherited a difficult task that cannot be fixed quickly.
“He’s setting expectations really, really low,” said Anit Mukherjee, a policy fellow and economist at the Center for Global Development in Washington.
Wickremesinghe’s remarks also sent a message to potential lenders: “You can’t let a country of such strategic importance collapse,“ said Mukherjee, who noted that Sri Lanka sits in one of the world’s busiest shipping lanes.
The Sri Lankan economy is foundering under the weight of heavy debts, lost tourism revenue and other effects of the pandemic, as well as surging costs for commodities. The result is a country hurtling towards bankruptcy, with hardly any money to import gasoline, milk, cooking gas and toilet paper.
Lawmakers from the two main opposition parties are boycotting parliament this week to protest Wickremesinghe, who became prime minister just over a month ago and is also finance minister, for failing to deliver on his pledges to turn the economy around.
Wickremesinghe said Sri Lanka is unable to purchase imported fuel due to heavy debt owed by its petroleum corporation.
The Ceylon Petroleum Corporation is $700m in debt, he told lawmakers. “As a result, no country or organization in the world is willing to provide fuel to us. They are even reluctant to provide fuel for cash.”
The crisis has started to hurt Sri Lanka’s middle class, which is estimated to be 15% to 20% of the country’s urban population. The middle class began to swell in the 1970s after the economy opened up to more trade and investment. It has grown steadily since.
Until recently, middle-class families generally enjoyed economic security. Now those that never had to think twice about fuel or food are struggling to manage three meals a day.
“They have really been jolted like no other time 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 hard hit the more vulnerable are,” Fonseka added.
The situation has derailed years of progress toward relatively comfortable lifestyles aspired to across South Asia.
Government officials have been given every Friday off for three months to save on fuel and grow their own fruits and vegetables. The inflation rate for food is 57%, according to official data.
Wickremesinghe took office after days of violent protests over the country’s economic crisis forced his predecessor to step down. On Wednesday, he blamed the previous government for failing to act in time as Sri Lanka’s foreign reserves dwindled.
The foreign currency crisis has crimped imports, creating the severe shortages that also include medicine and forcing people to stand in long lines to obtain basic needs.
“If steps had at least been taken to slow down the collapse of the economy at the beginning, we would not be facing this difficult situation today. But we lost out on this opportunity. We are now seeing signs of a possible fall to rock bottom,” he said.
So far, Sri Lanka has been muddling through, mainly supported by $4bn in credit lines from neighbouring India. But Wickremesinghe said India would not be able to keep Sri Lanka afloat for long.
It also has received pledges of $300m to $600m from the World Bank to buy medicine and other essential items.
Sri Lanka has already announced that it is suspending repayment of $7bn in foreign debt due this year, pending the outcome of negotiations with the International Monetary Fund on a rescue package. It must pay $5bn on average annually until 2026.
Wickremesinghe said IMF assistance seems to be the country’s only option now. Officials from the agency are visiting Sri Lanka to discuss the idea. A staff-level agreement is likely to be reached by the end of July.
“We have concluded the initial discussions, and we have exchanged ideas on various sectors,“ Wickremesighe said.
Representatives of financial and legal advisers to the government on debt restructuring are also visiting the island, and a team from the U.S. Treasury will arrive next week, he said.