Sri Lanka has run out of fuel, power and food. With the people out on the streets and the besieged ‘government’ — if one can call it that as the Rajapaksas have lost legislative majority — refusing to step down, the country is in the grip of both a humanitarian tragedy and a governance breakdown. But in immediate terms, this is a financial crisis. Sri Lanka is bankrupt and needs foreign aid and lines of credit urgently. India and China have between them cobbled together aid of over $5 billion, with fuel and medicines thrown in, but these are just drops in an ocean for a country that has foreign exchange reserves of just about $2 billion, perhaps enough for a month’s imports.

But how did it get here? Just before the pandemic set in, the country’s export of goods and services were about $20 billion in a GDP of over $80 billion ; tourism, which constitutes a large chunk of the services exports of $8 billion, was well and truly wiped out by the pandemic and the Easter Bombings that preceded it. To make matters worse, the Rajapaksas embarked on a rash experiment with organic farming that impacted tea, spices and rice output. Today, a current account deficit of 3.8 per cent of GDP, a fiscal deficit of 9.6 per cent and a public debt to GDP ratio of 120 per cent, an external debt stock of over 60 per cent of the GDP, are indicative of an economy in the ICU. Sri Lanka has relied too much on exports of tea and tourism without developing a diversified domestic industrial and services base. I

Clearly, the island nation needs to correct course, shifting from sheer export-reliance in the medium term — but right now it desperately needs forex cover to meet its debt obligations and buy essentials. About $7 billion — more than thrice the current level of reserves — is due for repayment this year, $1 billion of that as early as in July. Add to this about six months’ imports and the least the country needs to relieve its citizens of their misery is about $20 billion. The IMF is the only realistic option now open for Sri Lanka and it must move quickly. Yes, the multilateral agency will prescribe harsh conditionalities ranging from an immediate increase in taxes, rashly slashed by the government in a fit of populism, slashing of subsidies and an increase in interest rates to quell inflation and shore up the Sri Lankan Rupee. It’s a bitter pill that the beleaguered country has to swallow to stay afloat. But before that an important task awaits it — to put in place a credible government. The IMF will not take up Sri Lanka’s case in the absence of a finance minister and a responsible government that it can hold to account. Sri Lanka is today a denuded democracy. Its Sinhala majoritarian, autocratic rule with the disappearance of a credible opposition has led to the decline of accountability, and checks and balances. The rule by a clique has impacted the quality of decision-making. The first step should be to change this but that’s not going to be easy.

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