Sri Lanka’s Power Crisis Is Weighing On its Economy

Discussions about Sri Lanka’s power crisis may well have died down because reports of a significant monetary crisis in the Asian nation circulated final summer season, but Sri Lanka is nevertheless a lengthy way from financial recovery. As it awaits an International Monetary Fund (IMF) bailout to assistance its rebound, it continues to face significant fuel shortages and reduce industrial activity, as it focuses on fostering new power partnerships and attracting new investments. 

In the final quarter of 2022, Sri Lanka was driven even additional into recession, as borrowing charges reached a two-decade higher, with funds getting employed to handle inflation. The country’s GDP dropped by 12.four % in between September and December, compared to the identical period in 2021. Sri Lanka’s economy has now contracted for 4 quarters in a row, marking the worst monetary crisis for the state in seven decades. 

But aid may well be on the way, as Sri Lanka hopes the IMF will unlock a $two.9-billion bailout that was authorized in September at their meeting next week, which could attract higher investment to aid the nation commence to get back on track. Sri Lanka has been creating alterations to assistance its application for funding which includes rising taxes and cutting power subsidies, it also introduced a additional versatile exchange price and elevated its benchmark interest price to address inflation. In current months, customer charges have been sent sky higher, as the nation faced provide shortages and has handful of funds for its imports. Nonetheless, as IMF funds commence to arrive, the country’s economy is anticipated to commence on the lengthy road to recovery. 

A significant knock-on impact of the financial crisis has been observed in serious power shortages. 

Final year, Sri Lanka ran out of fuel, causing schools to close and resulting in widescale protests. The lack of fuel was blamed mostly on poor financial management and the Covid-19 pandemic. It was additional exacerbated by the unwillingness of suppliers to deliver new shipments of fuel following years of unkept promises and overdue payments – totalling about $700 million final July. 

Following the commence of the power crisis, the government introduced a “National Fuel Pass” as a signifies of rationing fuel, which supplied persons with a weekly quota primarily based on the quantity plates of registered automobiles. It also implemented a 12-22 % rise in fuel rates, which drove up inflation. Citizens and prospective foreign investors known as for new fiscal reforms to address the financial and power crises and establish a roadmap for recovery. 

The crisis largely stems from Sri Lanka’s reliance on foreign power products for the country’s industrial improvement. The lack of obtainable fuel has brought considerably of Sri Lanka’s manufacturing operations to a halt and meant that households and corporations have been left facing serious monetary troubles. 

In February this year, Sri Lanka elevated electrical energy rates by 66 % to encourage the IMF to approve funding. Inflation has currently reached 54.two % and there are worries that this elevated price will drive inflation up additional. Nonetheless, the government is nevertheless obtaining it hard to afford crucial fuel imports due to the fact of its low foreign currency reserves. Hence, it is justifying the enhance as a signifies of convincing the IMF to bail it out, major to the introduction of efficient fiscal policies and longer-term financial improvements. The country’s Power Minister, Kanchana Wijesekera, stated “We know that this will be tough on the public, particularly the poor, but Sri Lanka is caught in a monetary crisis and we have no selection but to move towards price-reflective pricing.” Wijesekera added, “We hope that with this step Sri Lanka has moved closer to receiving the IMF programme.”

But the turmoil has not stopped foreign interest in the country’s power sector. In February, India stated that it would be signing a pact to hyperlink the two countries’ energy grids and commence negotiations on an amended trade agreement inside two months. India has currently provided Sri Lanka $four billion in help, but Sri Lanka is hoping to improve its trade relations and investment perspectives, as it edges closer to getting IMF funding. 

The Sri Lankan Higher Commissioner Designate to India, Milinda Moragoda, explained: “We have to have development, otherwise fundamentally the economy will shrink.” Moragoda added “As far as development is concerned, India presents that prospect. So we will have to move on that. Tourism from India, investment from India, integration with India. That is what we have to do.” Aspect of this strategy incorporates the improvement of the country’s renewable power sources in the north for energy to be exported to southern India via a cross-border transmission cable.

Meanwhile, China’s Sinopec announced this month that it plans to finance the building of a refinery in the Hambantota district in Sri Lanka. Representatives from the power firm presented Sri Lankan President Ranil Wickremesinghe a proposal outlining their “readiness to invest in the import, storage, distribution, and marketing and advertising of fuel to cater to Sri Lanka’s power needs.” The refinery could deliver a minimum capacity of one hundred,000 bpd for export. This would add to Sri Lanka’s low export capacity from its ageing 50,000 bpd Kelaniya refinery. Investments in the country’s power sector could aid Sri Lanka solidify its lengthy-term power safety, even if it faces shortages in the brief term. 

Sri Lanka remains in a state of limbo as it waits for the IMF to release considerably-necessary funds to introduce new fiscal policies and commence on the road to financial recovery. Meanwhile, the government is focusing on fostering relations with other nations in the area to aid attract investments and increase its lengthy-term power safety. Only time will inform if the island state can pull itself out of each its financial and power crises. 

By Felicity Bradstock for Oilprice.com

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