Financial Insights

Sri Lanka on the verge of bankruptcy

Sri Lanka is facing a deep economic crisis which could lead to its bankruptcy in 2022. Recently, Central Bank of Sri Lanka has sold over 50% of its gold reserves, which was earlier valued at $382.2 million, to be left with $175.4 million.

On 30th August, 2021, the government announced a national emergency after its currency value fell sharply which led to inflation. Inflation rose to a staggering 11.1% in November 2021 and has been escalating ever since. Following this, Sri Lanka’s credit rating fell from B to C which made borrowing of funds a lot more difficult. Its foreign reserves fell to $1.6 billion due to which it had to restrict the import of several items. The main cause of the financial crisis is the low growth rate and huge debts.

It currently owes $5 billion to China and it borrowed another billion from Beijing in 2021 which is being repaid in instalments. However, what it owes to China is nearly 10% of its total external debt. Nearly 47% of its total debt is market borrowings. The interest to be paid is roughly two-thirds of government revenue. Iran, to whom Sri Lanka owes $251 million for oil, is being repaid with tea.

The currency reserves are expected to completely deplete by the end of January 2022. To cut costs, Sri Lanka has closed down several foreign national missions. Today, 1 Indian rupee is equivalent to 2.7 Sri Lankan rupee.

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