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Category: Bullion Bulletin

Bullion Bulletin: Sri Lanka is a straw in the wind

We are staggered in the West that inflation has officially reached its highest levels since 1982 – 7% in the US and more than 5% in the UK. Yet we s...

27 January 2022

Gary Mead

We are staggered in the West that inflation has officially reached its highest levels since 1982 – 7% in the US and more than 5% in the UK. Yet we should feel lucky – in Sri Lanka, the independent island nation at the tip of India, inflation is now running at an annual 14%. Which means the Sri Lankan rupee is annually losing 14% of its purchasing power.

Sri Lanka’s official foreign exchange reserves have been falling precipitously; there are fears the country could be approaching bankruptcy. It has shortages of many basic items, and frequent power cuts, as the country has run low on US Dollars to pay for imports.

Sri Lanka’s central bank governor Niward Cabral says that Sri Lanka sold some of its gold reserve in December 2020 to increase liquid foreign assets (cash). Sri Lanka’s central bank may have sold about 3.6 tonnes of gold out of 6.69 tonnes of gold reserves in early 2021, leaving it with about 3 tonnes of gold. The foreign reserves have now dropped to around $1.5 billion – which covers only one month of imports. Sri Lanka’s foreign debts are around $35 billion, some 10% or more of which is owed to China; it needs to repay about $4.5 billion this year.

As an example of how geopolitical power has shifted from West to East, Sri Lanka’s future has become dependent on its relations with China. Unable to repay a $1.4 billion loan for a port construction in southern Sri Lanka at Hambantota, it was forced to lease the facility to a Chinese company for 99 years in 2017. Sri Lanka has asked China to restructure its debt, which, given that Sri Lanka is a key part of China’s ‘Belt and Road Initiative’, is likely – but China may well demand a high price.

The World Bank says that 74 low-income countries will have to repay some $35 billion in debt repayments this year to official and private creditors, 45% more than in 2020. Ghana, El Salvador and Tunisia are also facing a worsening debt crisis. The World Bank suggests that as interest rates are once more rising and credit becomes more expensive, “the risk of disorderly defaults is growing”.

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