Sri Lankan crisis sends an inflation warning to the whole world

A protester reacts after a bus parked at the top of the road to the residence of Sri Lankan President Gotabaya Rajapaksa was set on fire during a protest against him as many parts of the crisis-hit country faced up to 13 hours no electricity due to shortage of foreigners. currency to import fuel, in Colombo, Sri Lanka, March 31, 2022. REUTERS/Dinuka Liyanawatte – RC2UDT9YTUQQ

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MUMBAI, April 4 (Reuters Breakingviews) – Sri Lanka’s collapse is on the minds of many. Read more Protesters, fed up with crippling shortages of essential food and fuel items, are in the streets, prompting several members of Prime Minister Mahinda Rajapaksa’s cabinet to offer their resignations on Sunday night. The social unrest is likely to hasten a restructuring of some $44 billion of international sovereign debt. Although Sri Lanka’s troubles follow years of mismanagement, its rapid unraveling is a warning to stronger economies in Europe and Asia that are suddenly facing rising costs of living.

A current account crisis has intensified after the West fired its sanctions bazooka at Russia as punishment for its invasion of Ukraine. Rolling blackouts and a state of emergency are driving away the remaining tourists, a crucial source of foreign exchange. Food inflation reached a surprising 30.2% in March. The currency’s 40% depreciation against the US dollar in a month, including a central bank-managed devaluation, is outpacing leverage ratios: public debt estimated by the International Monetary Fund at 120% of GDP is perhaps a few 40 percentage points more than could be considered sustainable, Citi guesses.

The worsening crisis mutes the impact of unconnected financial lifelines, including a $1.5 billion currency swap from China in December and shipments of rice and diesel from India. The IMF points out that the policies needed to reduce debt to sustainable levels are neither economically nor politically feasible. Thus, Sri Lanka’s $1 billion bond due in July is trading at 67 cents to the US dollar, compared to 74 cents in early February. The cuts will stretch from China to Wall Street, where market borrowing accounted for 47% of Sri Lanka’s foreign government debt in April last year.

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It is a reminder of the political implications of high prices. Before the Russian invasion of Ukraine, few Asian countries had double-digit consumer inflation. The most prominent were Sri Lanka and Pakistan, whose prime minister, Imran Khan, dodged a no-confidence motion on Sunday and called new elections. The poorest countries are most vulnerable to rising global food prices because their populations spend more on food than on discretionary items. But pandemic dislocations in supply chains and trade meant advanced economies overall faced a jump in prices three times larger than emerging markets between 2019 and 2022, according to IMF estimates in January.

Whether countries rush to deal with rising prices with tax cuts or increased subsidies, Sri Lanka’s rapid unraveling offers a warning of the political risks of complacency.

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– Multiple Sri Lankan cabinet members have offered to resign, multiple media outlets reported on April 4, adding that the resignations did not include Prime Minister Mahinda Rajapaksa or his brother, President Gotabaya Rajapaksa. The Prime Minister’s son, Namal Rajapaksa, Minister of Youth and Sports, confirmed his resignation effective immediately on Twitter.

– “We submitted resignations to the prime minister saying we are ready to leave at any time,” Education Minister Dinesh Gunawardena told reporters in Colombo, Bloomberg reported on April 4.

– On April 3, protesters in Colombo, Sri Lanka’s largest city, staged numerous small, peaceful demonstrations over the dire economic crisis, defying a nationwide curfew. Meanwhile, police used tear gas to disperse protesting students in the central city of Kandy. The president declared a state of emergency on April 1 as the island grapples with rising prices, shortages of essential goods and ongoing power outages.

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Edited by Antony Currie and Katrina Hamlin

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which, according to the Trust Principles, is committed to integrity, independence and freedom from bias.

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