![]() The reality of global economic headwinds and tremendous disruptions within the country signal a much longer crisis. This rosy analysis of the way forward recommended by mainstream analysis over the past six months, however, is now coming under critical scrutiny. Sri Lanka’s economy could contract by one tenth this year alone The green light from the IMF and solvency through debt restructuring would supposedly enable Sri Lanka to access temporary financing from regional powers such as China, Japan and India, and eventually access new loans from international capital markets. This would allow the country to negotiate with creditors, including private bondholders, to restructure its significant external debt. Experts hold on to the belief that if Sri Lanka can pass a debt sustainability analysis by demonstrating a commitment to fiscal reform, it will receive a seal of approval from the IMF. The government has already implemented many of these policies. The IMF has offered recommendations such as floating the rupee, raising interest rates, freezing state expenditure on projects and increasing energy prices. The mainstream policymaking consensus within Sri Lanka now argues that the government must pursue an agreement with the IMF to support restructuring its debt and set it back on the path of growth. This process culminated in the accumulation of tremendous debt stock in the form sovereign bonds – and eventually the default on its sovereign debt in April this year. It drew in greater inflows of global finance for mega infrastructure projects and speculative investment in urban real estate. After the government’s victory against Tamil separatists in 2009, it accelerated the process of liberalisation. They did not want to undermine their political base for wartime mobilisation. With the breakout of civil war in 1983, successive governments pursued further market reforms including privatisation, but with some caution. The Sri Lankan Civil War started in 1983 as the Tamil Tigers, LTTE claimed an independent Tamil state called Tamil Eelam. LTTE militants listen to leader of the Liberation Tigers of Tamil Eelam, Velupillai Prabhakaran (L), during a rally, on Augnear Jaffna, after the Indo-Sri Lanka Peace Accord was signed on 29 July 1987. This created a political and economic crisis in the early 1980s.īuddhist monks are restrained by fellow demonstrators, on Juy 28, 1987, in Colombo during a demonstration against proposed peace accord between Sri Lanka and India to end the country's ethnic struggle. ![]() But as its current account and fiscal deficits ballooned with unrestrained imports and state expenditure on infrastructure projects, international agencies began demanding austerity. They facilitated a massive infusion of donor aid. The International Monetary Fund (IMF) and World Bank experimented with Sri Lanka as the front runner. With the onset of the global debt crisis in the early 1980s, other developing countries followed with structural adjustment programmes. This meant devaluing the rupee, curtailing food subsidy and social welfare more broadly, and generally opening the country to trade and financial liberalisation. Sri Lanka was the first country in South Asia to pursue economic liberalisation in the late 1970s. Such alternatives may also provide clues to other developing countries in line to default on their sovereign debt, and which are facing potential crisis dynamics like those in Sri Lanka.Ī tea picker in the southern district of Ratnapura, as Sri Lanka on Auglifted a ban on chemical fertiliser imports after farmer protests, forecasts of severe food shortages and worries about the island's crucial tea exports. Alternative approaches of relief, public distribution and self-sufficiency are sorely needed to cushion people from the devastation. Indeed, policies of austerity are making an unprecedented collapse even worse. As an economic depression now takes hold, the same policies that he is likely to impose will further undermine the economy. Mr Wickremesinghe, who on Friday appointed Dinesh Gunawardena as prime minister, is a career politician whose legislative career, going back to 1977, spans the making of the country’s current economic crisis. On Wednesday, the Sri Lankan Parliament elected Ranil Wickremesinghe as the republic’s interim president.
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