The time has come for Sri Lanka to confront its financial demons head-on. It will be a tough fight, but a currency board – which deprives the government and the central bank of the opportunity to mismanage the budget and the exchange rate – greatly improves its chances of winning.
COLOMBO – The war in Ukraine has generated an economic tidal wave, which is sweeping through countries near and far. Among the furthest is Sri Lanka, half a world away from the battlefield, where soaring food and fuel prices accelerated a downward spiral that was already underway. Today the island is rocked by street protests and all cabinet members – except Prime Minister Mahinda Rajapaksa, the brother of President Gotabaya Rajapaksa – have resigned. Saving Sri Lanka from economic collapse and socio-political disaster will require drastic action.
Currently, no credible discussion on a viable strategy to deal with the deepening crisis is taking place. So while escalating protests may lead to a change of government, it is far from certain that this would lead to improved social or political conditions. Whoever is responsible, the imperative remains the same: Sri Lanka must face up to the serious economic crisis it is facing, starting with cleaning up its public finances.
There’s no time to lose. Finance Minister Ali Sabry, in office for barely a month, says the country’s foreign exchange reserves now stand at less than $50 million. And with about $7 billion of the country’s $51 billion in external debt due this year, a debt moratorium has been put in place. Moreover, the 600 million dollars that the World Bank granted to ensure essential food imports will not be enough to stop the financial hemorrhage.
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