Author: Branita

Sri Lanka’s Colombo Stock Exchange halted trading at 10.38 am as an index of liquid stocks plunged more 5 percent in intra-day trading.

The broader All Share Index was down 3.72 percent.

“Please note that the Market has been halted for 30 minutes due to the S&P SL20 index dropping over 5% from the previous close, as set out in SEC Directive dated 30th April 2020,” the Colombo Stock Exchange said in its website.

“The halt will be lifted at 11.08 A.M.”

Sri Lanka stocks have been on the decline since the central bank allowed flexibility in the currency. The currency has fallen over 50 percent so far since it was allowed flexibility on March 7.

Market analysts have expected a long-overdue correction, amid macro-worries.

The stock has been driven by loose monetary policy both at home and abroad. Some stocks have been bought as an inflation hedge with the rupee expected to fall.

Others have also benefited from imports controls.

Sri Lanka’s loose monetary policy however has led to increasing external weakness which has translated into disrupted supplies.

Is this the end of the road for President Gotabaya Rajapaksa and the powerful Rajapaksa brothers that had dominated Sri Lankan politics for decades? Going by the anger in the streets triggered by financial mismanagement and the near melt down of the island’s economy, the Rajapaksa family firm is running out of steam. Protest marches are now a daily occurrence. “Go back Gota” slogans and placards are held out by the same people who not long ago hailed the Rajapaksas as heroes.

The Russia-Ukraine war which has led to a steep hike in oil prices has further amplified Sri Lanka’s economic problems. The crisis resulting from Sri Lanka running out of foreign reserves has led to shortages of almost everything- from petroleum and cooking gas, to medicines, essential food staples, vegetables, fruits and all other items. Colombo, the thriving capital of the island state, is now a place of empty shelves and serpentine queues. Supermarket shelves are empty, there are long queues for bread.

The army had to be deployed to oversee the situation in petrol stations and kerosene distribution centres. Troops were called in after three elderly citizens dropped dead during the long wait in the queues.

Sri Lanka Deploys Soldiers At Petrol Pumps As Country Faces Worst Financial Crisis

People spend hours to collect a few litres of petrol, short-tempered drivers waiting in line are getting into scuffles with other equally tired and angry car owners. School exams are all cancelled indefinitely as the country has run out of paper. It is a nightmare for citizens. Power cuts are as long as 7.5hours daily, despite assurances from the country’s leadership that power outages would come to a halt from March 5. Summer in the island is hot and humid.

“Most of us in Sri Lanka are plagued by uncertainty and fear. Our list of uncertainties keeps rising. We will we run out of milk powder, rice or vegetables. Will there be electricity and fuel? Will the gas cooker explode because the gas supplier has fiddled with the composition of gas? Will there be water? Will there be enough supplies of medicines…..the list goes on and on,’’ Samantha Mendes (name changed because of corporate rules), a senior professional, told Outlook.

This is her description of what she saw a few days back in a posh colony in Colombo.

“I was at HSBC Bank down Flower Road when I noticed a line of gas cylinders. Did a double take and realized that the line of empty cylinders was as far as the eye could see. Apparently, people came in as early as 6 am and they were still waiting at 1 pm. This was not a one-off event but a daily routine. I talked to a young lawyer who told me that he chased a gas delivery lorry for several kilometers and finally managed to get one.’’

She blames this on the ‘lack of strategic thinking by the top leadership of the country.’

Sri Lanka’s economy depends heavily on tourism, but the pandemic had stopped all tourist inflows. The 2019 Eastern bombings in Colombo squeezed out western tourists. The government believes that nearly $14 billion was lost due to non- arrival of tourists over the last two years. The economy is estimated to have contracted by 1.5 % in July, September 2021, according to the central bank.

While the government cannot be blamed for the lack of visitors, President Gotabaya’s sudden announcement on last April of a complete ban on chemical fertislisers to make Sri Lanka the first in the world to go completely organic, wreaked havoc on the economy. Agriculture is the mainstay of nearly 70 per cent of the people, and the overnight change without careful planning backfired. Gotabaya said he took the decision because of health considerations, but also spoke of the need to cut imports due to the economic crisis. At that time, W.A. Wijewardena, a former central bank deputy governor, was reported in the local press as saying that the President’s overnight organic leap was “a dream with unimaginable social, political and economic costs”. The isla­nd’s US $1.5 billion tea industry that employs a million people was also badly affected by the fertiliser ban. Got­abaya finally had to withdraw the ban.

Gotabaya had refused to go to the IMF to bail him out of the economic mess. That was recommended by experts over three months back. Now, reluctantly, he has done so. Earlier, he appealed to India, China and Bangladesh for help.

India gave Colombo a one-billion-dollar credit line to help ease foreign exchange shortage and provide for food and medicines during finance minister Basil Rajapaksa’s recent visit. In January India had extended a $400 million currency swap and also offered $500 million credit for purchase of petroleum products.

China which had invested heavily in Sri Lanka had also extended credit and allowed a currency swap. Colombo is now approaching China for a fresh $2.5 billion to firm up its dwindling finances. Talks are on but the Chinese ambassador in Colombo had said that the loan would be in “competitive terms” the envoy was quoted by the local press as saying. Many in Sri Lanka are sceptical of Chinese terms, considering that in 2017 it had to lease the Hambantota port for 99 years, to China to convert it into equity as it failed to repay the huge loan. Despite China’s large footprints across the island state, there is growing public mistrust over Chinese credit. However a desperate government has little option at the moment and will take whatever conditions China offers.

Sri Lanka, the maritime hub in the Indian Ocean, is feeling rudderless at the moment due to a critical economic crisis. The double whammy of inflation and the crushing burden of foreign debt is leading to resentment among the public that is spilling out on the streets with chants of ‘Go Home Gotabaya’.

An opposition-led rally two weeks ago saw a huge turnout. Even youngsters were seen participating with posters voicing their anger against the Rajapaksa family. One poster said “no family should have this much power”. This unfolded as Sri Lankan Finance Minister Basil Rajapaksa was making his second visit to India in less than four months, seeking a $1 billion line of credit. After granting the economic lifeline, India’s External Affairs Minister S Jaishankar is now travelling to Colombo both for bilateral meetings and to participate in the BIMSTEC ministerial meeting ahead of the BIMSTEC summit on March 30. The repeated visits of Basil Rajapaksa earlier were meant to seek financial help from India. However, this time the need was even more pressing with Sri Lanka too strapped to even afford essentials like food items. Last week, the price of milk powder for a 400 gm pack was hiked in one go by 250 Sri Lankan rupees. A young protester holds up a poster opposing the Rajapaksa family. However, Sri Lanka’s larger economic problems have been in the making. And the debt trap is largely blamed on the Rajapaksas and their proximity to China. From Hambantota to now the proposed Port City of Colombo, the Chinese footprint is all over.

The Chinese Harbour Engineering Company (CHEC) has created a piece of land from the Indian Ocean for Sri Lanka just south of the Colombo port. A 269 hectares of land has been reclaimed but what next? Sri Lanka is desperately seeking investors to build the critical infrastructure needed to make it a multi-services hub in Asia much on the lines of Dubai or Singapore. However, the Port City Commission hesitates from drawing that parallel.Saliya Wickramsuriya, spokesperson, Port City Colombo Economic Commission, Government of Sri Lanka, says that more than tax holidays, they want to use Sri Lanka’s strategic location as a transit between Asia and the West as a unique selling proposition. It is here that the desire that Sri Lanka is seeking Indian investors becomes very clear. The Commission argues that since 70% of the trans-shipment business on the Colombo port is India’s, investing in the Port City Colombo project will be advantageous to the neighbour.

However, India had a bitter experience with Sri Lanka not too long ago. In early 2021, Sri Lanka unilaterally dissolved a deal between itself, India and Japan. The speculation was that it was done at China’s behest. Later, after much protest, West Container Terminal now has Indian investment. However, while the East Container Terminal was a government to government deal, the West Terminal has commercial investments from private players. The Indian and Japanese governments were extremely upset at the turn of events only last year. Despite the turbulence in relations due to the container terminals, the Sri Lankan side is pushing for more Indian investment now for the ambitious Port City Colombo which at the moment is like a white elephant for the Sri Lankans. The Port City Commission claims there is no Chinese control over the projects. Wickarsuriya also adds, “The Chinese company has taken all the risk. The government of Sri Lanka has nothing to lose with the failure of the project, on the other hand it has a lot to gain from its success and so do the others. That’s what we are hoping we can convince the investors from India about.”

However, out of the 269 hectares of land, 43% or 116 hectares has been leased to CHEC, which is a subsidiary of the Chinese state-owned Chinese Communication and Construction Company (CCCC). On the ground as well, the Chinese involvement is ubiquitous. Photos of Chinese President Xi Jinping with Sri Lankan Prime Minister and former President Mahinda Rajapaksa find a prominent place as you enter the auditorium that runs a promotional film of the model port city.Photos of Xi Jinping with Mahinda Rajapaksa find a prominent place at the auditorium. The model presents a futuristic picture of what Sri Lanka wants the port city to be like. Yamuna Jayaratne, Director, Sales and Marketing, Port City Colombo says, “On the long term, to realise the full vision and for it to reach its maturity, it will take about 20 years as per our estimate.”

Right now, a high-end, but only a small portion called the Marina has been sold, but the rest of the plan needs massive investment for building the infrastructure on the reclaimed land. The opposition in Sri Lanka has been sceptical of the project due to an Act that gives the Commission a free hand to develop the project. Some believe the Port City would turn into a province of China as it has its own jurisdiction too. The general public is increasingly viewing such projects as wasteful when the country is struggling with basics like food and electricity. The project also ran into rough waters with environmentalists and fishing communities. Twenty cases against the project had reached the Supreme Court. The project was finally given a go-ahead after a 30-member committee gave a green signal but with 72 conditions.The project also ran into rough waters with environmentalists and fishing communities.

The Commission says they have done a thorough impact assessment and cost-benefit analysis. WADD Wijesooriya, Head of Environmental Management, Port City Colombo cites examples from the Netherlands to Dubai to Changi Airport to say land reclamation is not a new concept. He explains that the concerns regarding coastal erosion and the fear that the north and south of Colombo will be washed away due to reclamation work have also been addressed. The land reclamation has been done in record time of 30 months by China, but now the process has slackened due to lack of investors. Sri Lanka hopes that India, which does a bulk of its shipment through this route, will find value in investing.
They also say that inquiries have been made by the US and German embassies about the Port City Project. They claim the project doesn’t fall under China’s contentious Belt and Road Initiative, but the overt involvement of China in Sri Lanka under the Rajapaksas remains a hurdle that the island nation well realises.

India has agreed to develop three Sri Lankan wind farms on islets between the countries, officials said Tuesday, in a victory for New Delhi after the project was taken away from a Chinese firm.
New Delhi has long been alarmed about the growing Chinese influence in the region.

A $12 million project to build wind turbines on three small islands in the Palk Strait between southern India and Sri Lanka was awarded to a Chinese firm in 2019, with funding lined up from the Asian Development Bank (ADB).

But after Indian protests about Chinese activity so close to its coast, work never began and the project on the islets of Nainativu, Analaitivu and Delft was later scrapped.

A joint statement issued Tuesday after a visit to Colombo by India’s foreign minister S Jaishankar said a memorandum of understanding had been signed to build the installations.

Sri Lankan officials said India had agreed to provide funding in place of the ADB.

Last week, the Chinese ambassador in Sri Lanka, Qi Zhenhong, expressed Beijing’s displeasure over the scuttling of the project and warned it would send a negative signal to potential foreign investors.

India is known to be suspicious of China’s growing political and economic influence in the South Asian nation, which is strategically located at the southern tip of the vast Indian sub-continent.

China and India have been competing for major infrastructure projects in Sri Lanka, which is currently facing its worst economic crisis since independence from Britain in 1948.

Colombo has asked for more loans from both nations to shore up its foreign reserves and import essentials including food, fuel and pharmaceuticals.

Sharine Silva, a hair and makeup artist in Colombo, has been struggling to make ends meet as costs of essential items skyrocket in Sri Lanka, which has been facing one of its worst economic crises in recent decades.

“There’s no fresh milk or milk powder for tea. Prices for baby milk formula are exorbitant,” said Silva, a mother of two.

“It feels like a war where we have to ration our foods now. That sounds so silly given this day and age,” she added.

Skyrocketing inflation, weak government finances, ill-timed tax cuts and the Covid-19 pandemic, which hurt the important revenue-generating tourism industry and foreign remittances, have wreaked havoc on the Sri Lankan economy over the past several months.
Prices of food items, for instance, shot up by as much as 25% in the last month alone.

Shortage of food and fuel

Meanwhile, the nation’s foreign currency reserves plummeted by about 70% since January 2020 to around $2.3 billion (€2.1 billion) by February, even as it faces debt payments of about $4 billion through the rest of the year.

Sri Lanka’s current reserves are only enough to pay for about a month’s worth of goods imports.

A shortage of foreign currency has meant that the country has been struggling to import and pay for essential commodities like fuel, food and medicines.

These challenges has led to cuts in electricity generation, with only four hours of power a day, and long queues outside fuel stations.

Even the newspaper and printing industries have been hit by a severe shortage of printing material, forcing cuts in publications and school examination postponements.

Prasad Welikumbura, a social and political activist in Sri Lanka, said it’s the daily-wage earners who’ve borne the brunt of the crisis.

“It’s really hard for people like taxi drivers and tuk-tuk drivers,” Welikumbura told DW.

The economic pain has caused growing anxiety and frustration among Sri Lankans, with many of them blaming the government of mismanaging the economy.

Tax cuts and pressure on public finances

The economic emergency poses a significant challenge for President Gotabaya Rajapaksa, who came to power in 2019 promising rapid economic growth.

During his presidential campaign, Rajapaksa promised to cut the 15% value-added tax by nearly half and abolish some other taxes as a way to boost consumption and growth.

The tax cuts led to a loss of billions of rupees in tax revenues, putting further pressure on the public finances of the already heavily indebted economy.

Then came COVID, which dealt a huge blow to the tourism sector, which accounts for over 12% of the nation’s total economic output.

Sri Lanka’s public debt, which was already on an unsustainable path before the pandemic, is estimated to have risen from 94% in 2019 to 119% of GDP in 2021.

“The reduction of taxes and subsequent adding of more money through central bank financing made the inevitable crisis significantly worse,” said Chayu Damsinghe, an economist with Frontier Research group.

India, China and IMF to the rescue?

To address the economic problems, Rajapaksa’s government has restricted imports of several items which have been declared “non-essential.”

It has also approached India and China for assistance.

It’s reported on Monday that Colombo has sought an additional credit line of $1 billion from India to import essential items, after Sri Lankan Finance Minister Basil Rajapaksa signed a $1 billion credit line with New Delhi earlier this month.

In addition to the credit lines, India extended a $400-million currency swap and a $500-million credit line for fuel purchases to Sri Lanka earlier this year.

Meanwhile, Sri Lanka has asked China to restructure its debt repayments to help navigate the financial crisis. The country is also in talks with China for a further $2.5 billion in credit support.

Despite the bilateral deals, economists say Sri Lanka will have to either restructure its debt or approach the International Monetary Fund (IMF) to negotiate a relief package.

After initially refusing to knock on the doors of the IMF, Rajapaksa’s government recently said it would begin talks with the global financial situation to seek a way out of the crisis. Rajapaksa is set to fly to Washington, D.C. next month to start negotiations for a rescue plan.

Former Minister and Government MP Wimal Weerawansa has hinted at moves to form a new opposition group and sit in the opposition benches in Parliament.

Speaking during a live television program last night, Weerawansa said that he and former Minister Udaya Gammanpila are currently sitting as independent MPs in Parliament.

Asked if he is now a member of the opposition, Weerawansa responded saying “not yet”.

He said that there are several political parties in the opposition, including the Samagi Jana Balawegaya, JVP and Tamil National Alliance.

Weerawansa said that there is a move no form a new group in the opposition and several are expected to join it.

The former Minister said that their intention is to ensure the Government loses its majority in Parliament.

He said that if the Government loses its majority then there will be pressure on Finance Minister Basil Rajapaksa to step down.

Weerawansa said that what is required today is not for the President to step down but for the Finance Minister to be removed.