Sri Lanka faces a foreign-exchange crisis

A stalled peace process and high oil prices take their toll

President Kumaratunga’s government is facing a familiar crisis — it needs foreign investment to help check a looming financial crisis, but her loony Left alliance partners are opposed to selling of a share of a state-owned oil company to India’s Bharat Petroleum. India’s Exim Bank recently lent $150 million to Sri Lanka to enable it to purchase oil from ONGC (oil diplomacy?).

The peace process is stalled due to the LTTE’s obstinate stand on interim self-governance as a pre-condition, and the stalemate is causing international donors to shy away (coercive aid diplomacy?). Meanwhile record high prices of oil are fast depleting the government’s foreign reserves and causing the currency to slide. The Sri Lankan government finds itself in a position where divesting its holdings in state-owned enterprises is one of the few immediate options it has.

Last week Sri Lanka said it faced a “foreign exchange crisis” triggered by rising global oil prices and the slowing aid flows.

It slapped taxes of 10 to 20 percent on some 100 “luxury goods” including imported processed food, fruit, vegetables, perfumes, footwear and household wares, to tackle the crisis.

“It’s better to face reality than hide from it,” Premaratne said of the government’s surprise admission that the economic picture was worrying. “You can now take corrective action and educate the market as well.”

Inflation, which stood at 3.7 percent in April, is now 14.4 percent, fuelled by rising fuel costs and surging import costs. The rupee has fallen seven percent against the dollar since the start of the year. [Lanka Business Online]