COLOMBO: The International Monetary Fund cautioned Sri Lanka on Thursday that its foreign debt was ‘unsustainable‘ and urged the country to devalue its currency and increase taxes in order to rehabilitate its almost bankrupt economy.
The epidemic drove the South Asian island’s tourist industry, a critical source of foreign currency, over a cliff, and the government issued a comprehensive import embargo in March 2020 in an attempt to shore up foreign cash.
However, more than two years later, Sri Lanka is still struggling with food and fuel shortages. This week, buses ran out of diesel and the government shut down the country’s public transportation.
This is what the International Monetary Fund said in its annual report on the government’s finances. It said that the country’s $51 billion in foreign debt couldn’t be paid because the country’s rapidly shrinking foreign reserves couldn’t pay them back.
According to official figures, Sri Lanka would need about $7 billion this year to pay its foreign debt, but the country’s external reserves were at only $2.07 billion at the end of January, hardly enough to cover one month’s imports.
The International Monetary Fund said that a “credible and coherent approach” is needed to restore macroeconomic stability and debt sustainability. It suggested a return to a “market-determined and flexible currency rate,” which would mean a rupee devaluation.
Central bank: 197 rupees to the dollar. An underground market sells US currency notes for 260 rupees at a rate that the central bank doesn’t want to be seen with.
This gap has resulted in a more than 50% reduction in international remittances through legitimate banking channels. However, the IMF said that the country’s economic difficulties started bee the outbreak.
The IMF said President Gotabaya Rajapaksa slashed various taxes roughly in half shortly after taking office in November 2019, the IMF said, reducing government income and requiring the government to borrow more.
The IMF suggested that income taxes and VAT be raised to help with the economic crisis, “along with revenue management changes.”
An inability to import gasoline due to a scarcity of dollars has resulted in a severe energy crisis.
Besides cancelling public transportation on Wednesday, the state’s electrical utility put in place the longest planned power outage in more than 25 years. This was the longest planned power outage in more than 25 years.
Rice, milk powder, sugar, and wheat flour are hard to come by because the country doesn’t have the money to pay for imports. Companies in the country can’t buy raw materials or equipment because they don’t have the money.
A record high of 16.8% inflation was set in January, the fourth month in a row that the rate has been at that level. The IMF said that it expects inflation to stay in the double digits.
International rating agencies have downgraded Sri Lanka on concerns that it would be unable to pay its foreign debt, despite the government’s assurances that it will be able to do so.
