COLOMBO: Sri Lanka is bankrupt and the acute pain of its unprecedented economic crisis will linger until at least the end of next year, Prime Minister Ranil Wickremesinghe told parliament Tuesday (Jul 5).
The island nation's 22 million people have endured months of galloping inflation and lengthy power cuts after the government ran out of foreign currency to import vital goods.
Wickremesinghe said the once-prosperous country will go into deep recession this year and acute shortages of food, fuel and medicine will continue.
"We will have to face difficulties in 2023 as well," the premier said. "This is the truth. This is the reality."
Inflation reached 54.6 per cent in June as the Indian Ocean nation battles its worst economic crisis in decades, and the central bank is expected to raise rates at its next policy announcement on Thursday to rein in prices.
Wickremesinghe said Sri Lanka's ongoing bailout talks with the International Monetary Fund (IMF) depended on finalising a debt restructuring plan with creditors by August.
"We are now participating in the negotiations as a bankrupt country," the prime minister said. "Therefore, we have to face a more difficult and complicated situation than previous negotiations."
Despite a suspension of repayments on about US$12 billion of foreign debt in April, Wickremesinghe said Sri Lanka still had payments of nearly US$21 billion lined up until the end of 2025.
It faces strong headwinds, with the central bank estimating a contraction in growth of 4 to 5 per cent this year, with inflation to hit 60 per cent by year-end, he said, though the government targets a smaller contraction of 1 per cent in growth next year.
After reaching a staff-level agreement with the IMF, Sri Lanka aims to hold a donor conference with "friendly countries" such as China, India and Japan to secure more loans through a "common agreement", Wickremesinghe told lawmakers.
Last week, the IMF said talks with Sri Lanka had been "constructive", raising hopes it would soon grant preliminary approval for a desperately needed financial support package.
Analysts warn that rate hikes will have little impact in reducing galloping prices, however, since they are largely being driven by higher fuel costs.
Sri Lanka is currently almost completely without petrol and the government has shut down non-essential public services in an effort to conserve fuel.
This week, authorities extended a closure of schools, told public servants to work from home and limited fuel distribution to essential services as the country struggles to pay for new fuel shipments.
The crisis comes after COVID-19 hammered the tourism-reliant economy and slashed remittances from overseas workers.
It has been compounded by the build-up of huge government debt, rising oil prices and a ban on the import of chemical fertilisers last year that devastated agriculture.
Weeks of sometimes violent protests led to the resignations of key ministers in May, leaving President Gotabaya Rajapaksa and Wickremesinghe struggling to stabilise the situation.
Sri Lanka owes at least US$3.5 billion to China and other countries and global investment funds that have also lent tens of billions to Colombo want assurances that any debt relief they provide will be matched by Beijing.
The United Nations estimates that about 80 per cent of the public are skipping meals to cope with food shortages and record prices.