Sri Lanka Facing 'National Default Crisis' to Inject 1.3 Trillion Won for Public Welfare Support

Growth Slowdown, Inflation, and Concerns Over Foreign Debt Repayment
Funds Allocated for Worker Wage Increases and Agricultural Subsidies

[Image source=EPA Yonhap News]

[Asia Economy Reporter Cha Min-young] Sri Lanka, facing a triple crisis of slowing growth, inflation, and warnings from international credit rating agencies about potential sovereign debt default, is injecting emergency relief funds worth approximately 1.3 trillion won to support livelihoods.

According to Sri Lankan media such as Economy Next on the 4th, Finance Minister Basil Rajapaksa announced the day before that emergency relief funds totaling 229 billion rupees (about 1.34 trillion won) will be injected. This amount corresponds to 1.2% of Sri Lanka's gross domestic product (GDP).

The funds will be used to increase the salaries and pensions of public sector workers by 5,000 rupees (about 29,000 won) per month and provide 1,000 rupees (about 5,900 won) support to approximately 2 million people. Small-scale farmers will also receive cultivation support funds. Tax reductions will be implemented in the food and pharmaceutical sectors.

The authorities decided to release emergency funds because Sri Lanka's economic situation is deteriorating rapidly. Highly dependent on the tourism industry, Sri Lanka has faced difficulties following the 'Easter Sunday bombings' in April 2019 and the COVID-19 pandemic. Government spending increased due to the Belt and Road Initiative with China, and fiscal conditions worsened after transferring port operation rights to the Chinese state-owned port company, China Merchants Port Holdings, for 99 years in 2017.

The economic situation has clearly worsened. Foreign exchange reserves, which reached 7.5 billion dollars (about 8.9 trillion won) in 2019, decreased to 1.58 billion dollars (about 1.9 trillion won) as of November last year. The economy, which grew 12.3% in the second quarter of last year, contracted by 1.5% in the third quarter of the same year. Inflation also surged, reaching 12.1% last month.

The country's credit rating has also declined. International credit rating agency Fitch downgraded Sri Lanka's sovereign credit rating by one notch from CCC to CC in mid-last month. According to Fitch, government-issued bonds that Sri Lanka must repay amount to 500 million dollars (about 600 billion won) this month and 1 billion dollars (about 1.2 trillion won) in July. Additionally, the total principal and interest on foreign debt due this year is reported to be 6.9 billion dollars (about 8.2 trillion won). Fitch warned, "Concerns over a sovereign default are increasing as Sri Lanka is unable to repay its 26 billion dollars (about 31.1 trillion won) in foreign debt."

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