Sri Lanka’s annual inflation rate surged to more than 70% in August due to the struggles with its worst economic crisis in over seven decades.

According to official data, food prices also rose by 84.6% compared to a year ago. The South Asian country of 22 million people was plunged into financial and political chaos this year as it faced a shortage of foreign currencies. Owing to this, the country has been unable to afford key imports, including fuel, fertiliser and medicine.

In August, the Central Bank of Sri Lanka stated that it expected inflation to ease, as the country’s economy slowed, after peaking at about 70%. Official figures released showed that the economy had contracted by 8.4% in the three months leading to the end of August.

Prior to the pandemic, Sri Lanka was heavily reliant on tourism for foreign currencies, including the US dollar. However, border closures aimed to slow the spread of Covid-19 kept tourists away and took a major toll on the country’s economy.

Additionally, years of financial mismanagement has equally led to Sri Lanka defaulting on its debts earlier this year. In recent months, Sri Lanka has faced political upheaval, with the country’s former President, Gotabaya Rajapaksa, fleeing abroad before finally resigning in July.

His resignation was a result of scores of protests by hundreds of thousands of people over a sharp increase in food and fuel prices. Many Sri Lankans blamed Mr Rajapaksa’s administration for mishandling the crisis.

Earlier this month, Sri Lanka reached a preliminary deal with the International Monetary Fund for a $2.9bn loan. However, the agreement is dependent on the country also receiving funds from private creditors.

India’s rescue plan for Sri Lanka’s economy

On Tuesday, September 20, 2022, India indicated that it had started talks with Sri Lanka on restructuring its debt. It noted that it would also offer long-term investments, as it had previously provided almost $4bn in financial aid to its smaller neighbour.

Moreover, India deferred payment on Sri Lankan imports of about $1.2bn and offered a credit line of $55m for fertiliser imports. Sri Lankan government officials are due to meet creditors on Friday, to discuss the extent of the country’s economic problems and a proposal to restructure its debts.

Prior to this, Sri Lanka’s Central Bank Governor, P Nandalal Weerasinghe, revealed that the country could have avoided its current economic turmoil if it had gone to the International Monetary Fund (IMF) for a bailout earlier. He stated that the delay in seeking outside help was a mistake.

“If we had taken the decision to go to the IMF earlier, if we started the debt resettlement process one year before, we could have managed the situation without this kind of suffering in this country.”
P Nandalal Weerasinghe

Mr Weerasinghe explained that Sri Lanka was experiencing its worst economic crisis since independence from Britain in 1948.

A complication in the IMF negotiations to salvage the economy is Sri Lanka’s substantial borrowing from China, which Mr Weerasinghe indicated, accounts for 15% of the country’s total external debt.

The fund has a policy of not bailing out countries unless all its other creditors have first agreed to write down their loans. That notwithstanding, Mr Weerasinghe is confident China as a “good friend of Sri Lanka [will] offer similar relief that will be offered by other creditors” as well.