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Message: <blockquote data-quote="deanXX" data-source="post: 27458777" data-attributes="member: 492830"> <ul> <li data-xf-list-type="ul">Sri Lanka is in economic crisis, some analysts say</li> <li data-xf-list-type="ul">Debts have spiralled, reserves are low and growth has lagged</li> <li data-xf-list-type="ul">Island heavily reliant on tourism, devastated by pandemic</li> <li data-xf-list-type="ul">Central bank says situation is stable, no need for IMF help</li> <li data-xf-list-type="ul">Former officials, economists question government policies</li> </ul>COLOMBO, Feb 25 (Reuters) - In late November 2019, after winning Sri Lanka's presidential election and months ahead of a parliamentary ballot that would again test his popularity, Gotabaya Rajapaksa gathered his cabinet and made good on a campaign promise to slash taxes.The move, which included a near-halving of value added tax, blindsided some top central bank executives."The tax cuts just after the elections came as a surprise," P. Nandalal Weerasinghe, the Central Bank of Sri Lanka's (CBSL) Senior Deputy Governor until September 2020, recalled."There was not any kind of a consultative process," added Weerasinghe, who spent 29 years at the CBSL before retiring.The economic argument for the cuts was simple - to free up spending and boost Sri Lanka's ailing finances.A similar move by an administration led by Gotabaya's older brother Mahinda had helped drive the country's economic recovery after a decades-long civil war ended in 2009, a ruling party member close to the Rajapaksas said."That is why they made this promise ... Then, the pandemic came," said Milinda Rajapaksha.The case against was that reducing potential revenues when obligations were high was risky and undermined a 2019 debt management plan that hinged on a narrowing fiscal deficit."That was a mistake," W.D. Lakshman, the CBSL's governor between December 2019 and September 2021, said of the cuts, in his first interview since leaving office.Not long after the move, the pandemic struck, crippling an economy heavily reliant on tourism.While the hit to Sri Lanka's coffers was all but inevitable, three former CBSL officials and some analysts said policies before COVID-19 struck and since have exacerbated the problems, leaving the country in a vulnerable financial position.The government did not respond to a request for comment on the state of the economy and whether policy errors were made.The CBSL said in a statement that the economy was in better shape than some reports suggested, with the key tourism industry already showing signs of revival and the stock market performing "reasonably well".Yet foreign exchange reserves have shrunk almost 70% in two years to $2.36 billion, short of $4 billion or so in debt repayments due in 2022.Inflation has surged, key imports have been held up at Colombo port due to the lack of cash and the conflict in Ukraine has pushed energy bills higher. There is only enough fuel for a few days; national power cuts have begun.NEVER DAUNTED'At a time when Sri Lanka badly needed access to international capital markets to keep its debt management programme on track, a series of downgrades by rating agencies in the wake of the pandemic in 2020 effectively locked it out.<img src="https://cloudfront-us-east-2.images.arcpublishing.com/reuters/HX66354OU5N73ASZI7ANXBCZCY.jpg" alt="Sri Lanka’s falling credit score" class="fr-fic fr-dii fr-draggable " style="" />The debt-laden island nation is struggling to fill its shrinking foreign currency reserves and raise funds from the international capital markets after a series of credit rating downgrades.In the past when times were tough, Sri Lanka has turned to the International Monetary Fund (IMF) for help.But potential discussions with the IMF on restructuring Sri Lanka's foreign debt were effectively shot down by the government and CBSL leadership as early as April 2020, Lakshman said, including by himself as governor.Sri Lanka overshot its fiscal deficit target by more than two percentage points in 2021, and the trade deficit widened to $8.1 billion in December 2021 from $6 billion a year before.Foreign workers' remittances slumped 22.7% to $5.5 billion in 2021.The government, led by Rajapaksa and his brothers, has raised swaps and credit lines worth $1.9 billion from India, and two more are under negotiation with Pakistan and Australia.<a href="https://www.reuters.com/world/asia-pacific/shocks-missteps-how-sri-lankas-economy-ended-crisis-2022-02-25/" target="_blank">https://www.reuters.com/world/asia-pacific/shocks-missteps-how-sri-lankas-economy-ended-crisis-2022-02-25/</a></blockquote>

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