‘Bankrupt’ Sri Lanka Says Inflation Headed for 60%

Inflation reached 54.6% in crisis-hit Sri Lanka in June and is likely to hit 60% by year-end, Prime Minister Ranil Wickremesinghe warned on Tuesday.

Negotiations with the International Monetary Fund have got more difficult and complicated because the country is bankrupt, the PM told Parliament.

After initially hoping for a rapid bailout from the IMF, the government now plans to present a long-term debt restructuring plan to the global lending agency by the end of August, in a bid to win approval for a four-year funding programme, he said.

Economic mismanagement and the aftermath of Covid-19 have left the cash-strapped country of 22 million people unable to pay for essential imports of food, fertiliser, medicines and fuel because of a severe dollar crunch.

With the Indian Ocean nation battling its worst economic crisis in decades, the central bank is expected to raise rates at its next policy meeting on Thursday to try to rein in prices.

Speaking after a recent visit by an IMF delegation, Wickremesinghe outlined a road map to lawmakers to chart a way out of the crisis.

“We are now participating in the negotiations as a bankrupt country,” he said, referring to the talks with the global lender. “Therefore, we have to face a more difficult and complicated situation than previous negotiations.”

Despite a suspension of repayments on about $12 billion of foreign debt in April, Wickremesinghe said Sri Lanka still had payments of nearly $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% this year, with inflation to hit 60% by year-end, he said, though the government targets a smaller contraction of 1% in growth next year.

ALSO SEE: Sri Lanka Talks to China on Debt Rejig After IMF Meetings

Donor Conference Planned

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 said.

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, meanwhile, have warned that rate hikes will have little impact in reducing galloping prices, since they are largely being driven by higher fuel costs.

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 $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.