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Sri Lanka economy faces risk amid Ukraine war

Sri Lanka economy

Hit by soaring oil import costs and a dip in tourism revenue, Sri Lanka is racing to avert a default amid dwindling foreign exchange holdings

Russia’s war in Ukraine, which has convulsed global financial markets, is now threatening to crush an $81 billion economy more than 4,000 miles away in the Indian Ocean.

Hit by soaring oil import costs and a dip in tourism revenue, Sri Lanka is racing to avert a default amid dwindling foreign exchange holdings.

With inflation already at 15 per cent – the worst in Asia – the conflict is only making it harder for the island country. Fuel shortages and blackouts lasting as long as seven hours have become daily routine, while the wait gets longer at gas stations where prices surged almost 50 per cent this month.

The authorities are struggling to contain the crisis. They have raised interest rates, devalued the local currency and placed curbs on non-essential imports.

But with a meagre $2 billion in forex reserves and $7 billion in debt payments due this year, the battle is turning uphill. The government this week finally abandoned its reluctance to seek help from the International Monetary Fund (IMF) and President Gotabaya Rajapaksa pledged to fulfil Sri Lanka’s obligations.

The crisis also showed how Russia’s war is putting some of the fragile developing economies at risk and imperilling decades of efforts to lift millions out of poverty.

In South Asia, other vulnerable countries include Bangladesh, Maldives, Nepal and Pakistan, said Bloomberg Economics economist Ankur Shukla. Though direct trade and financial linkages with Russia and Ukraine are limited, the ‘price and supply shocks are powerful’, he wrote in a note on March 9.

With a population of about 22 million, Sri Lanka is a net importer of goods from medicine to fuel. In December last year, petroleum products accounted for about 20 per cent of inbound shipments and the cost jumped 88 per cent from a year earlier. The increase in oil prices this year is adding to the burden.

Another pain point is tourism revenue. About 30 per cent of visitors this year were from Russia, Ukraine, Poland and Belarus, and the war is threatening to turn off that tap.

Sri Lanka earned $3.6 billion from tourism in 2019 before the pandemic slashed that to less than a fifth two years later, official data showed.

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