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TeaThe Maldives and Sri Lanka, both highly tourism-dependent tropical islands, have seen the pandemic ravage their economies and finances. Government debt in the two smaller Indian Ocean countries is expected to exceed 100% of GDP this year. Unsurprisingly, both have similar — and equally bad — credit standings. There is a “real prospect” by CCC-rated borrowers on the Fitch Ratings scale.
And yet, Maldives is turning the corner on visitor arrivals, with numbers last month exceeding the figure for August 2019. Sri Lanka, where a deadly Easter Sunday suicide bomb attack hit tourism even before the pandemic hit two years ago, is lagging. .
With a population of just half a million, the Maldives was badly affected by the delta variant. In May, the virus infected about three out of 1,000 people in just one day. Sri Lanka, which is home to 21 million, has seen a comparatively more manageable spike, with new cases increasing on a 7-day average to less than 6,000 at the end of August. This is 0.28 new infections for one thousand people.
Since then, Covid-19 has been retreating, and the country is on track to cover 60% of its population with the required two vaccine doses by the end of the month. Among other popular beach destinations, Mauritius, which reached that milestone late last month, is optimistic about a revival in its leisure industry. With some luck, and the resumption of international flight links, winter could bring even more vacationers to Sri Lanka’s sandy beaches. However, will this be enough to cause a 99.6% drop in tourism income from pre-pandemic levels? apparently not.
But that’s not the only problem. It doesn’t help that a 9% depreciation in the Sri Lankan rupee since the start of the pandemic – a depreciation that could make tourist cities like Galle and Kandy cheaper for vaccinated travelers from India – has also sparked a food crisis . Amid a severe shortage of imported rice, sugar, milk, pulses and cereals, President Gotabaya Rajapaksa declared an economic emergency from August 31, and named an army officer as commissioner of essential services, a clear indication that Food queues are getting serious.
At least they are serious enough to replace the head of the central bank with one of the president’s several brothers in the cabinet, Finance Minister Basil Rajapaksa. Ajit Nivard Cabral, who was governor between 2006 and early 2015, is returning to his old job in search of money. The $3.55 billion kitty can barely cover two months’ worth of imports, after paying off $1 billion of debt from foreign exchange reserves in July. Additionally, $3.65 billion of repayment on hard-currency lending is coming next year. If Cabral has the magic wand, he’ll have to wave it now – or Sri Lanka will have to seek a rescue from the International Monetary Fund.
Tea, the country’s best-known export, could have helped ease the shock. But the commodity, which earned $1.2 billion last year, is facing its own crisis due to the government’s sudden decision to phase out chemical fertilisers. The industry is not finding enough new buyers of niche, organic tea to make up for the three-fold jump in cost of production. Experts have warned that crop diseases could spell indelible disasters as in 1869, when the island’s then-important coffee plantations were wiped out by a fungal infection.
Colombo could not have had a worse time than this to go back to the 19th century. The country’s share among the top global sellers of beverages has been declining for some time now. Rivals who manage to woo more customers than Ceylon tea won’t let them go in a hurry. Not only this. Even with the vegetable crop picking up, the ban on fertilizer imports is unforgivable. Nevertheless, the decision to reverse it was abandoned.
The Rajapaksa administration does not want to appear politically weak by changing its mind. Or maybe he knows that Sri Lanka will not need to go to the IMF. Since the start of the pandemic, a warm relationship with China has helped the president secure a $1 billion loan, in addition to a $1.5 billion dollar swap facility with the Chinese central bank and the gift of 600,000 vaccine shots Is. Colombo could approach Beijing again for help, automatically putting some pressure on its neighbour.
At a public debt-to-GDP ratio of around 90%, India’s own finances are not entirely better than those of the Maldives and Sri Lanka, although a large, diversified economy gives it a huge impact with investors – and a (barely) ) Investment-grade credit rating.
Despite being aware of the ongoing economic trouble at its south-eastern tip, India has long delayed taking a decision on Colombo’s request for a loan-repayment moratorium. Given its $3 billion investment in Afghanistan, New Delhi’s appetite for economic diplomacy may be less than usual. Still, caught in a debt trap, the previous Sri Lankan government sold the port of Hambantota to China Merchants Port Holdings Company. New Delhi may be forced to bring its own checkbook, forcing the Beijing-backed enclave to stop at its doorstep.
The deepening economic crisis is weighing down Rajapaksa’s options, but the president is yet to run out of cards. –bloomberg
Read also: How Sri Lanka is facing economic calamity after adopting complete organic farming overnight
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