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Sri Lankan Debt Crisis Update

Graham Watson

19th January 2023

Sri Lanka's turmoil continues with the government choosing to defer the salaries of certain state sector employees (presumably not their own) due to the financial situation, and all ministries - of which there are plenty - being ordered to make 5% spending cuts.

None of this bodes well for development, as lower spending on infrastructure and public goods is an opportunity cost of higher debt interest repayments.

Background on the Sri Lankan Debt Crisis

Sri Lanka has been facing a debt crisis in recent years, due to a combination of factors such as high government spending, a large trade deficit, and a depreciation of the Sri Lankan rupee. The country has been struggling to service its large external debt, which stands at around $64 billion as of 2021, and has had to seek assistance from international organizations such as the International Monetary Fund (IMF) to help address the crisis.

The crisis has been exacerbated by the COVID-19 pandemic, which has led to a sharp decline in tourism and foreign investment, two major sources of foreign currency for Sri Lanka. This has put pressure on the country's balance of payments and has led to a shortage of foreign currency, making it difficult for the country to import goods and pay its debt.

The government has implemented a number of measures to try to address the crisis, including cutting government spending, increasing taxes, and seeking assistance from international organizations. However, these measures have been met with resistance, and the crisis remains ongoing.

The debt crisis has had a negative impact on the Sri Lankan economy and the living standards of Sri Lankan citizens, with high inflation, high interest rates, and a decline in economic growth. Some experts warn that the crisis could lead to a debt default or a sovereign debt restructuring if not addressed in a timely manner.

Graham Watson

Graham Watson has taught Economics for over twenty years. He contributes to tutor2u, reads voraciously and is interested in all aspects of Teaching and Learning.

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