SRI LANKA ought to be sitting pretty. Its growth has averaged 6% a year over the past decade. Seven years after a protracted civil war ended, its economy is still reaping a peace dividend. It is also a beneficiary of the collapse in commodity prices, which has trimmed its hefty bill for imports of fuel. Yet last week, after long debate, its leaders requested a loan from the IMF.
If so much is so rosy, why is Sri Lanka going cap in hand to the IMF? The immediate concern is the capital flight that has buffeted emerging markets around the world. Although Sri Lanka’s current-account deficit had been declining steadily over the past few years, the country suffered big capital outflows last year as foreign investors sold down their holdings of government bonds.
The central bank fought against the tide for a while, using up some $2 billion, or more than a fifth, of its foreign-exchange reserves to defend the rupee. After it relented in September, the currency fell to a record low against the dollar and has since weakened further. To hear it from Ravi Karunanayake, Sri Lanka’s...Continue reading
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