The Macro Economic factors effecting Sri Lankan Economy

The Macro Economic factors effecting Sri Lankan Economy - student project

The SL government could not raise adequate liquidity owing to the unprecedented adverse market conditions, the CBSL continued to provide liquidity from the foreign reserves since 8 April 2020. Between 8 April and 22 June 2020, the Central Bank settled US$ 1,007 million of government debt utilising the Central Bank’s foreign reserves. Debt commitment for the period July 2021–July 2022 is approximately US$ 5–7 billion Reduction in the inflow of the foreign reserves at a time when the outflow is significant has made the current foreign crisis worse in the recent years.

Due to the foreign reserves crisis, the country is facing severe fuel shortages leading to daily power cuts, shortage of food, medicines, cement and other essential items. Long queues in front of grocery stores, pharmacies and fuel depots in many parts of Sri Lanka indicate the shortage of essential items. Importers are finding it difficult to get Letter of Credit (LOC) issued from the banks due to lack of foreign currency in the country. As a result, many of the containers are stuck at the Colombo port for several days since payments are not settled. 

Due to shortage of fuel, many power plants have to be kept shut, which is resulting in power crisis in the country. Some power plants are resorting to hydro energy using the waters basically used for irrigation purposes. Due to insufficient rains and increased use of reservoirs for the power plants, water shortage is anticipated which, as per experts, will badly affect agricultural production and may lead to food crisis. According to the All-Island Private Pharmacy Owners' Association, a severe drug shortage is looming as the existing back-up stocks of medicines are due to be used up within three months. Reportedly, Sri Lanka has a five-percentage shortage of required medicines.

Another fallout of the depletion of foreign reserves is downgrading of Sri Lanka’s sovereign ratings by the international rating agencies.It has impacted the investors’ confidence to invest in Sri Lanka as the country has been put in the ‘high-risk’ category of defaulting the debt servicing.