Foreign exchange reserves are almost exhausted in Sri Lanka, which has forced the government to suspend the repayment of its loans abroad. It therefore struggles to buy all essential imported goods, such as petrol or gas, which leads to serious shortages. A massive system of fraud partly explains the ruin of the country.
From our correspondent in the region,
There are three factors that have accumulated: the tourism crisis first. Terrorist attacks on churches in 2019, followed by the Covid-19 pandemic, drove tourists away from the island. The tourism sector then represented 5.9% of Sri Lanka’s GDP, this figure fell to 0.8% in 2020, also reducing the entry of the currencies necessary to import oil on the island among other things. Second reason: the massive and rapid indebtedness of the country, often at prohibitive rates towards China, for major infrastructure projects. And finally, the nail that closed the coffin: at the end of 2019, the new president Gotabaya Rajapaksa sharply reduced taxes, from VAT to income taxes, which ends up emptying the state coffers.
A massive system of fraud
But there is another essential factor rarely mentioned: the illegal flight of currencies, by the method of false invoices. For example, we declare that we import 1 million rupees worth of medicines, whereas we only buy 500,000. The difference, in cash, is taken out illegally to be placed on the financial markets or to buy properties abroad – where these Wealthy businessmen and corporations will find a better return than in Sri Lanka.
The problem is that this system of false invoices depletes the country’s currency reserves. According a study by the Global Financial Integrity group, this currency flight amounts to 39 billion euros between 2009 and 2018, which is almost the equivalent of Sri Lanka’s current external debt. A debt that the government can no longer pay because it lacks precisely these currencies.
The silence of the Rajapaksa clan in question
And this jeopardizes the country’s economic recovery because it is a systemic problem, which has lasted for decades, and which is maintained thanks to the collusion between the business community and elected officials. A similar flight of capital was partly responsible for the ruin of many African economies in the 1980s, with economic elites also smuggling their money out to buy apartments in Europe, for example; forcing the government to sell off natural resources to bring in foreign currency.
Sri Lanka can still stem this fall. To do this, the authorities must act on three institutions: the central bank, the banking system and customs, in order to control the volumes exchanged and the corresponding financial transactions. But for this to happen, it takes political will, and the elected officials in power today, like the Rajapakse clan, are the same ones who have tolerated this massive fraud for decades. Without their departure, such systemic change seems in jeopardy and Sri Lanka’s recovery will only take longer.
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