Hello and welcome to Business Daily from the BBC World Service, the Business podcast,

which brings you the trends, the money and the people who make the world and its money go
round. Podcasts from the BBC World Service are supported by advertising today on Business
Daily. With me, Rahul Tanden. What's gone wrong with the Sri Lankan economy? We hear
how it's affecting the lives of people in the country and why so many of them are protesting.
People can't afford their next meal. That is the saddest and the most dire state that any
country could get to. So how did the country get into so much debt? It owes more than $50
billion and how's it going to pay it off? We'll hear from one of those appointed by the
President to sort it out. The alternative is to undertake a negotiation with all the creditors.
There's no way that Sri Lanka is going to be able to pay back all the debt in the timeframe
that is scheduled to pay back.

For the past few weeks, Sri Lankans have been out on the streets of their country calling for
their President Tobaya Rajapaksa to resign. For many, this is the biggest economic crisis the
country has faced since independence. There's no petrol, there's no diesel. Kids can't sit their
exams because there's no paper and there's no power for 12 hours a day. How much worse do
you want it to get? People can't afford their next meal. That is the saddest and the most dire
state that any country could get to. They have robbed everything from us. They have robbed
the basic rights of the people. We don't have electricity for 17 long hours. No medicine.
Hospital stuck closed because we don't have medicine.
Many people have been posting their frustrations online. Let's hear from one of them. I'm 89
years old and for the last so many, 89 years, I have not gone through this misery. Every time
in the night when the light go off, I cry because there is nothing else for me to do. In my old
age, I cannot understand. There is no water, there is no lights. There is not enough food. What
is the meaning of this?
Sri Lanka is facing a huge debt crisis. It owes more than $50 billion and repayments on that
debt have left it with little money to buy essentials like fuel and medical supplies. Like many
countries in Asia and Africa, the Sri Lankan government also imports food. To give you a
sense of how much the crisis has affected food prices, this woman who asked us not to name
her recorded her trip to the shops in Colombo. I'm walking through a local shop right now
and looking at the prices of fruits and vegetables. Our grocery bill at home has gone up
around 50% in the last three months alone and most things we can't find anymore. So I'm
looking for milk powder right now and you can see a couple of boxes here, but they're selling
them for 800 and 4400 grams. I think around three months ago, that was around Rs480 for
400 grams. It's also very rare to find boxes in this powder available at all. Looking at the cost
of basic foods like lentils that we eat every day with our rice, they've gone up to 475. I think
earlier this year there were just 260. So you can see, even though food insertion overall it's
around 30%, loss of basic food items have gone up by much more. This morning I bought
bread for Rs120. It was 63 months ago. But looking at the bread in the grocery store, which is
a slightly bigger store than the one I bought it at, it's about 225. So that's a lot more. This is
sort of the situation in the country at the moment. I mean, it explains why you see most
people on the roads right now protesting. I was at the protest yesterday. It was pouring with
rain. There was lighting, the area was flooding. But the protesters were underlining. You can
feel that anger and frustration and desperation in people when you go through the protest
where they're shouting, saying they need to be able to see their children need to put food on
the table, but the inflation and the availability of who'd have really disrupted their daily lives.

Many people have similar experiences to her. But what about the business community? How
can you run a business doing all this economic chaos? Rajiva With Dana is the managing
director of Scientific Technologies, the company that's based in Colombo, which employs
more than 150 people. The biggest challenge we have is the lack of fuel to run our generators.
Today we had a power cut of about three and a half hours. During the morning hours. We are
expecting another power cut at somewhere around 05:00. One of the biggest challenges we
are facing is to find fuel to run these generators. I think the prices have gone up slightly more
than double what it was a couple of months back. And as far as finding fuel is concerned,
there are long queues in fuel stations.
How do you run a business with that energy uncertainty? Because it's the basis of business
having regular electricity your business. That's the billion dollar question right now. How we
could run this business, how we could sustain this business with this current prices. It is a
major issue. I'm getting goosebumps every morning when I get up. It is a major issue. As you
rightly said, the IT industry. Without electricity, there is no IT industry.
This is a long term problem. Do you worry that in six months your business may no longer be
there? That's a possibility. How possible is that? Well, if the current trend goes on entities if
the present government remains in power, because what has happened right now is people
have lost confidence in the present government I'm sure so is the world rest of the world. So
what is going to happen is if the present government is going to remain in power, the country
is going to be in dire straits. Okay.
So we've heard from a variety of people there about the problems that they are facing on a
daily basis. Those problems are caused by the fact that Sri Lanka owes so much money, more
than $50 billion, as we said earlier. So why does it owe so much money? Well, that's because
like many economies in Asia and Africa, it spends quite a lot of its revenue importing fuel
and medicines and also food at the moment because it just does not have enough money as
it's paying the interest on those loans is had to cut its electricity supplies every day. The fact
that the government put in place tax cuts in 2019 and that there are huge subsidies on things
like fuel means that in simple terms, the government is spending more than it receives. Let's
get some more analysis now. Amita Arudasim is an independent policy analyst. We tried to
get through to her, but the power cuts that we just talked about caused a few problems when
we tried to connect to her.
So I've had an unannounced power cut, and I've been running around trying to find a location
with a generator to connect to you guys with lots of apartments have been having these issues
with their generators because we need fewer to get the generators up and running, so they'll
often keep the generators running for half. Then we lost the connection a few hours later, but
we were back in business. Sorry for all of this. No, don't worry. One of the problems with the
size of money that Sri Lanka owes is that means it's struggling to pay for things it needs to
import, important things like food, medicine, fuel.
Absolutely. So Sri Lanka has a choice. It can either choose to make debt payments to its
creditors or it can choose to pay for its imports. It's essential goods, things like food, fewer
Pharmaceuticals and so on. The country is effectively bankrupt. As I said, we have a very
small amount of cash reserves and a lot of payments that are upcoming. And the government
thus far has chosen to repay our creditors. But this comes at cost to the local population. And
I believe that Sri Lankan policymakers were making the wrong decision. When it comes
down to making sure your population can afford food and fuel and pharmaceuticals, drugs.
Recently, we've had certain doctors and hospitals actually saying that they can't perform
surgeries because there are no drugs in the country. Many policy analysts and economists
who were able to see the trajectory of the country, who were looking at the numbers and
seeing that Sri Lanka's debt was unsustainable, have actually been advising Sri Lanka to
default on its debt earlier because at the end of the day, people shouldn't be queuing for fuel
and undergoing power cuts in order for us to repay our debts to financial markets.
Sri Lanka owes a huge sum of money. Who does it owe that sum of money to? Because
there's lots of questions about how much debt Sri Lanka owes to China.
Sure, there's a lot of discussion about whether Sri Lanka is or is not caught up in a Chinese
debt trap. And in my opinion, this story, this narrative is somewhat exaggerated because it is
not just China that Sri Lanka was money to. So even though the fraction of loans from China
increased from 2% in 2008% to 9% in 2017, China officially accounts with just 10% of Sri
Lanka's external debt stock, and that's on par with countries like Japan. In fact, market
borrowings actually account for over 50% of Sri Lanka's debt. So Sri Lanka owes much more
to Wall Street investors than it does to China. As you are listening to this program, the
protests are still continuing across Sri Lanka. Activists Barbane Fonseca recorded this clip for
us and (…..) calling for the resignation of Go Tara Tapas and for the government to go home.
That has been loud and clear. Unfortunately, the government is yet to heat this fall, but we
have seen continuous days of protest, peaceful protest of people, and this is likely to continue
into the coming days. So it's quite a remarkable site, quite a remarkable feeling here where
people are continuously calling for change.
Well, hours after she recorded that clip, the government made a dramatic announcement. It
said it was suspending repayments on billions of dollars of foreign debt. Here's Bovine's
reaction to it.
Well, unfortunately, the government had this decision. They had a choice in January when
there was a call to start restructuring the debt and instead decided to pay off loans at that time
instead of addressing essential needs in January. So now we've got to a crunch point where
we're revisiting this. But it's a worse crisis at the moment. And it's unfortunately, we've got to
this situation because the warning signs were there early on, even as early as 2020 and 2221,
the government was aware we were heading in this direction, but took no measures to address
this. So now we have got to today's announcement, which is alarming too many. But I think
in a way, this was going to happen. People knew this was going to happen, especially those in
government. It's extremely unfortunate that we have got to this stage.
Shanta David Aragian is the former chief economist at the World Bank. He's now a professor
at Georgetown University in the United States. He'll be part of Sri Lanka's negotiating team
when the country starts talks with the International Monetary Fund next week. The IMF is a
financial institution with 190 member countries. They work together to try and stabilize the
global economy. Shanta said the decision to default was a necessary part of an orderly debt
restructuring plan. It preserves the principle that Sri Lanka is treating its creditors equally.
And it also will mean that Sri Lanka will be able to use its foreign exchange reserves to buy
imports, which are much needed in this time of shortages of food, fuel and pharmaceuticals.
It also implies that Sri Lanka will undertake an orderly debt restructuring rather than a
chaotic default.
There is a lot of anger on the streets of Sri Lankan. A question that many people in the
country are asking is why has the government prioritized repaying debt over bringing in
essential supplies like medicines into the country?
I have no idea, to tell you the truth. I asked myself the same question. I asked them the same
question, but I have really no idea. I gave an interview or wrote a column back in January
saying, don't starve your people to pay back the debt. I said it as harshly as I could because
that's exactly what they were doing. And for some reason they didn't listen. They continued to
pay back the debt. And I still don't understand why they would do that. And it was not just
me. I mean, everybody was saying, don't do this. It really was a colossal error.
Okay, as a country, when you're a country that owes a lot of money, whether it's on Wall
Street or to other governments or to other financial institutions, how easy is it for a country
like Sri Lanka to restructure that debt? What are the challenges ahead for it?
It's not easy, but it really needs to be done because the alternative for Sri Lanka is a
disorderly default, which is something Sri Lanka should avoid at all costs. And so the
alternative is to undertake a negotiation with all the creditors, because the idea is that there's
no way that Sri Lanka is going to be able to pay back all the debt that it owes in the time
frame that is scheduled to pay back.
So is it about reducing the amount of money that it owes or increasing the time frame that it
can pay it back over?
It's usually a combination of all of the above. That is, you change the time frame and you
reduce the amount and you can reduce the amount on both the interest payments as well as
the principal. So, in usual debt restructuring negotiations, all three options are on the table,
and it depends on what the creditor is willing to accept and what the Sri Lankan government
is willing to accept that leads to the outcome. Eventually, they will pay back the debt, for
sure, but that's where the fiscal adjustment (регулировка) comes in. Right now, one of the
reasons why Sri Lanka is having trouble paying its debt is that it's got a fiscal deficit of about
11% of GDP. And so these anticipated adjustments that will be part of the program that they
propose to the IMF.
But what do we mean by that? Because does that mean reducing the amount you spend. So
are we talking about in Sri Lanka's case, cutting subsidies on fuel and that surely will make
the situation for many in the country even worse?
Yes, that's right. It's both increasing tax revenue and reducing expenditures. They will have to
reduce subsidies for fuel and for electricity. And this is potentially something which can lead
to social unrest. And particularly, it's even more concerning because these are people who
have been short of fuel and electricity over the last month or so what we are also making as
part of the program is a targeted cash transfer program for the poor.
Chante de Vrajan. They're clearly spelling out that Sri Lanka's economic problems are going
to continue for some time yet. We'll be following Sri Lanka's progress with the IMF in the
coming weeks here on the World Service.
I'm Rahul Tanden edition of Business Daily. It was produced by James Graham.