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Sri Lanka Plans to Stop Money Printing as Inflation Nears 60%

Sri Lanka Plans to Stop Money Printing as Inflation Nears 60%

Sri Lanka wants to cease injecting local currency to slow down Asia’s fastest inflation since it has run out of dollars to buy fuel and is creating rupees to pay local salaries. Before a review of the monetary policy is planned on Thursday, Prime Minister Ranil Wickremesinghe informed parliament on Tuesday that the inflation rate may reach 60 percent. Because of the country’s bankruptcy, he said, discussions for a rescue from the IMF are difficult.

In contrast to the original target of June, Wickremesinghe now anticipates that Sri Lanka will reach a staff-level agreement with the IMF in August. In June, consumer prices shot up by 54.6 percent in comparison to the same month a year before, as the transportation costs rose by 128 percent and food costs increased by 80%, respectively, due to severe crop and crude oil shortages. In spite of the country’s economy contracting, the Central Bank of Sri Lanka is on track to print more rupees this year than it did in 2021, which is also driving up prices.

The Situation

Due to severe dollar shortages brought on by economic mismanagement and the COVID-19 pandemic’s negative effects on the country’s tourism-based economy, the cash-strapped nation of 22 million people, which is experiencing its worst economic crisis in decades, has been unable to pay for imports of basic goods for months. Extreme shortages of food, medication, and fuels have forced the shutdown of several services and sparked widespread demonstrations that have been going on since March. The island government was obliged to close schools and stop supplying fuel to all but necessary services.

 Plans to overcome Inflation

Sri Lankan PM while addressing Parliament said, “Our plan is to control inflation. By the end of this year, inflation will rise to 60 percent,”. He further added, “In 2023, we will have to print money with restrictions on several occasions. But by the end of 2024, it is our intention to stop printing money completely.” After challenging bailout negotiations with the International Monetary Fund last week, Wickremesinghe made the announcement of the planned actions.

The strategy is intended to lower inflation so that it reaches between 4 and 6 percent by 2025, according to the premier, who also serves as finance minister and entered office in May. Wickremesinghe stated that Sri Lanka is entering into discussions with the IMF as “a bankrupt country” and provided a road map for how to resolve the situation. By the end of August, the government intends to submit its debt-restructuring proposal to the IMF for approval.

It is in accordance with the aspirations of the fund to stop printing money. According to Murtaza Jafferjee- the head of economist and Advocata Institute in Colombo, the IMF would not like printing of money, if they have to follow the order of IMF, “Printing money means the central bank is funding the government; under the IMF agreement we will have to enact the new monetary law act which will restrict funding the government so it will automatically stop,” he added.

He said, “The inflation rate could be even higher than projected.” “The situation can get worse if we have further supply chain blocks or fuel prices will go up further” Tourism- a crucial source of Sri Lanka’s foreign exchange reserves- could be a solution which could bring quicker relief than the IMF bailout loan- which may take months-

The South Asian nation had more than 1.9 million visitors in 2019. The number decreased to less than 200,000 last year when COVID-19 limitations disrupted the hotel sector. As of the first half of 2022, 380,000 visitors have already entered the nation, according to the Sri Lanka Tourism Development Authority, thus it is gradually picking up again.

What Led to Crisis?

Critics claim that the economic mismanagement of previous governments, which resulted in and maintained a twin deficit—a budget shortfall as well as a current account deficit—is what caused the crisis, the worst in recent decades. An Asian Development Bank working paper from 2019 said that Sri Lanka has a “typical twin deficits economy.” “Twin deficits” indicate that a country’s production of marketable products and services is insufficient and that its national expenditures are more than its national revenues.

Implementation of deep tax cuts ‘which Rajapaksa promised during the 2019 election campaign’ ravaged a portion of Sri Lanka’s economy. Notably, the implementation was executed months before the COVID-19 epidemic. That has expedited the present crisis. Credit rating agencies pushed to downgrade Sri Lanka and practically locked it out of the global financing markets as the lucrative tourism industry and revenues from overseas workers were decimated by the virus.

Due to the failure of Sri Lanka’s debt management programme, which was dependent on access to those markets, foreign exchange reserves fell by about 70% in just two years. The Rajapaksa administration’s proposal to outlaw all chemical fertilisers starting in 2021—a decision that was later overturned—also hurt the nation’s agricultural industry and caused a decline in the crucial rice harvest.

Sri Lanka’s Foreign Debt:

Only $2.31 billion remained in the nation’s reserves as of February, but it must repay almost $4 billion in debt in 2022, including a $1 billion international sovereign bond (ISB) that matures in July. At $12.55 billion, ISBs account for the greatest portion of Sri Lanka’s foreign debt, with the Asian Development Bank, Japan, and China being some of the other key lenders.

Who is Helping Sri Lanka?

Experts and opposition leaders have urged Rajapaksa’s government and the Central Bank of Sri Lanka (CBSL) to turn to the IMF for assistance, but they overlooked it. Apart from the IMF, Rajapaksha had sought help from China, India. India has sent a diesel shipment under a $500 million credit line signed with India. Both the countries have also signed $ 1 billion credit line for importing essentials such as food and medicine.

The government has sought at least another $1 billion from India. China is thinking about granting the island country a $1.5 billion credit facility and a second loan of up to $1 billion after giving the CBSL a $1.5 billion swap and a $1.3 billion syndicated loan to the Sri Lankan government.

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