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How Sri Lanka’s economy went into a tailspin

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Sri Lanka is suffering its worst economic crisis since its independence from Britain in 1948
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Sri Lanka is suffering its worst economic crisis since its independence from Britain in 1948. 

Months of lengthy blackouts and acute shortages of food, fuel and medicines have infuriated the public, with huge protests demanding the government’s resignation turning violent this week.

AFP reviews the origins of the snowballing economic calamity in the South Asian island nation:

– White elephants – 

Sri Lanka has spent big on questionable infrastructure projects backed by Chinese loans that added to its already unsustainable debt.

In southern Hambantota district, a massive deep-sea port haemorrhaged money from the moment it began operations, losing $300 million in six years.

Nearby are other Chinese-backed extravagances: a huge conference centre, largely unused since it opened, and a $200 million airport that at one point was unable to earn enough money to pay its electricity bill. 

The projects were pushed by the powerful Rajapaksa family, which has dominated Sri Lanka’s politics for much of the past two decades.

– Unsustainable tax cuts –

President Mahinda Rajapaksa was voted out of office in 2015 partly due to a backlash against his government’s infrastructure drive, which was mired in graft claims.

His younger brother Gotabaya succeeded him four years later, promising economic relief and tough action on terrorism after the island’s deadly 2019 Easter Sunday attacks.

Days after taking office, Gotabaya appointed Mahinda prime minister and unveiled the biggest tax cuts in Sri Lanka’s history, worsening chronic budget deficits.

Ratings agencies soon downgraded the country out of concern that the public debt was spiralling out of control, making it harder for the government to secure new loans.

– Pandemic hit –

The tax cuts were spectacularly ill-timed: just a few months later, the coronavirus began spreading around the world.

International tourist arrivals dropped to zero and remittances from Sri Lankans working abroad dried up — two economic pillars the government relied upon to service its debt.

Without these sources of overseas cash, the Rajapaksa administration began using its stockpiles of foreign exchange to make loan repayments.

– Fertiliser ban – 

Sri Lanka was soon burning through its foreign reserves at an alarming rate, prompting authorities in 2021 to ban several imports including — critically — fertiliser and agricultural chemicals farmers need to grow their crops.

The government sold this policy as part of an effort for Sri Lanka to become the world’s first completely organic farming nation, but its effects were disastrous.

As much as a third of the country’s agricultural fields were left fallow by farmers and the resulting drop in yields hit the production of tea — a vital export earner.

The policy was eventually abandoned at the end of 2021 after protests from agricultural workers and skyrocketing food prices.

– Shortages and blackouts –

By late 2021, Sri Lanka’s reserves had shrunk to $2.7 billion, down from $7.5 billion when Rajapaksa took office two years earlier.

Traders began struggling to source foreign currency to buy imported goods.

Food staples such as rice, lentils, sugar and milk powder began disappearing from shelves, forcing supermarkets to ration them.

Then gas stations started running out of petrol and kerosene, and utilities could not purchase enough oil to meet the demand for electricity.

Long queues now form each day around the country by people waiting hours to buy scant supplies of fuel, while blackouts keep much of the capital Colombo in darkness each night.

– Debt and default –

President Rajapaksa appointed a new central bank chief in April, who soon announced that Sri Lanka would default on its $51 billion foreign debt to save money for essential imports. 

The move failed to shore up Sri Lanka’s deteriorating finances, and it only had around $50 million in useable foreign exchange at the start of May.

The country is now in negotiations for an International Monetary Fund bailout.

Mahinda Rajapaksa, the prime minister, resigned on Monday in an effort to placate the public after weeks of protests over government mismanagement.

But central bank chief Nandalal Weerasinghe said Wednesday that unless a new administration took charge soon, the country was facing an imminent economic collapse. 

“No one will be able to save Sri Lanka at that stage,” he said.

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UK oil capital tackles the energy transition… up to a point

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Offshore wind turbines are a clear sign of a move towards green energy off the coast of Aberdeen in northeast Scotland
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In Aberdeen, northeast Scotland, offshore wind turbines, the extension to the city’s port, and hydrogen buses are clear evidence of the move to green energy.

But old habits die hard in the Granite City, which was built on the back of profits of oil and gas piped from the often turbulent waters off its shores.

Mention the energy transition and the response is of a “renewables boom”, never a decline in the drilling for hydrocarbons.

That looks likely to be the case for as long as oil and gas remains in the ageing North Sea fields.

Just a few months ago, the UK, which wants to become carbon neutral by 2050, hosted the world at the UN climate change conference COP26 in Glasgow.

Prime Minister Boris Johnson promised to make the country the “Saudi Arabia” of wind power.

The price of energy has since taken off, especially after Russia’s invasion of Ukraine, sending bills soaring and leaving many householders struggling to make ends meet.

Disruptions in the delivery of Russian gas to places such as Poland and Bulgaria have also seen the security of energy supplies become a top priority.

Downing Street has published a new strategy which continues to advocate the development of renewable energies.

But it also calls for investment in North Sea oil and gas.

– Security –

Deirdre Michie, chief executive of lobby group Offshore Energies UK, said the move was welcome and a “positive reinforcement” of the role the sector plays in both energy security and the energy transition.

“Even before the energy strategy we absolutely believed that security of energy supply and the energy transition go hand in hand,” she told AFP.

John Underhill, a professor in geoscience and energy transition at the University of Aberdeen, is in no doubt there has been a revival of interest in oil and gas — even in fields considered “sub-commercial”.

The Cambo oil field, off Shetland in Scotland’s far north, now looks set to be developed, despite fierce opposition from environmentalists which caused Shell to pull out and work to be suspended.

Underhill said people have started to think about where the energy comes from, and about “the role oil and gas plays in the UK and the wider community.”

In Aberdeen, local officials are in lockstep with industry.

Jenny Laing, who stepped down as leader of Aberdeen City Council last week, said: “With the local authorities in the last 10 years we’ve invested heavily in renewable energy sources… 

“But we do that in tandem with making sure we’re supporting the oil and gas sector. We realise people will be relying on fossil fuel for a number of years to come.”

For Laing, and for Michie, geopolitical unpredictability means it’s better to rely on oil and gas brought up from beneath British waters than more polluting energy from Russia or elsewhere.

– Expediency –

For Aberdeen and the surrounding area, economic expediency trumps everything.

Most locals either work in the industry or know someone who does.

Britons have abiding memories of the devastating impact of Margaret Thatcher’s abrupt closure of coal mines and steel plants in the 1980s.

And while the price of crude has spiralled to more than $100 a barrel since Russia’s invasion, Aberdeen and its environs are still recovering from 2014 when prices went the other way, plunging below $50.

Investment in renewables is therefore encouraged but not at the expense of scaring away the oil giants, mainly because they have the capital necessary to finance the energy transition.

“In Aberdeen we’ve had a very buoyant economy due to the oil and gas sector,” said Laing. “We want to make sure that we protect jobs and our local economy.”

Many also want the energy transition to be an opportunity to create a more level playing field.

Scott Herrett, who works as a “just transition organiser” at Friends of the Earth Scotland, said: “We have vast wealth which gets generated offshore in the North Sea here in Aberdeen and the northeast of Scotland.

“But we still have mass inequality in the city.”

Scientists from the UN Intergovernmental Panel on Climate Change in April warned that humans have only three years to radically transform the world economy, weaning it off fossil fuels to avoid catastrophic warming of the planet.

Aberdeen is trying to diversify, focussing on health, tourism and life sciences — but it’s not ready yet to do so without the money oil brings.

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Crisis-hit Sri Lanka set for new PM, unity government

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Respected five-time former premier Ranil Wickremesinghe was the frontrunner to head a 'unity government' in Sri Lanka
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Sri Lankan President Gotabaya Rajapaksa was set Thursday to name a new prime minister, hoping to assemble a unity government after weeks of anti-government protests triggered by a dire economic crisis turned violent.

However, while the mooted new prime minister — five-times ex-premier Ranil Wickremesinghe — and his cabinet can be appointed without a vote, it was unclear if he will be able to get any legislation through parliament.

In a televised address to the nation on Wednesday night, Rajapaksa stopped short of yielding to weeks of nationwide protests calling for him to resign over the country’s worst economic downturn since independence.

But in a bid to win over the opposition demanding he quit before agreeing to any new government, the 72-year-old pledged to give up most of his executive powers and set up a new cabinet this week.

“I will name a prime minister who will command a majority in parliament and the confidence of the people,” Rajapaksa said in the televised speech.

Mahinda Rajapaksa, the president’s brother, resigned as prime minister on Monday after his supporters attacked anti-government supporters who had been protesting peacefully for weeks.

This marked a turning point and unleashed several days of chaos and violence that killed at least nine people and injured more than 200, with dozens of Rajapaksa loyalist homes set on fire.

Security forces patrolling in armoured personnel carriers with orders to shoot on sight anyone engaged in looting or violence have since largely restored order.  

A curfew was lifted Thursday morning but only to be reimposed after a six-hour break allowing Sri Lanka’s 22 million people to stock up on essentials.

– Opposition split –

Sri Lankans have suffered months of severe shortages of food, fuel and medicines and long power cuts after the government, short on foreign currency to pay its debts, halted many imports.

The South Asian island nation’s central bank chief warned Wednesday that the economy will “collapse beyond redemption” unless a new government was urgently appointed.

Wickremesinghe, 73, is seen as a pro-West free-market reformist, potentially making bailout negotiations with the International Monetary Fund and others smoother.

The main opposition SJB party was initially invited to lead a new government, but its leader Sajith Premadasa insisted that the president first step down.

In recent days the party has split, with a dozen MPs from the SJB now pledging support to Wickremesinghe.

With many from Rajapaksa’s party having defected in recent months, now no group in the 225-member assembly has an absolute majority, making parliamentary approval of the unity government’s legislation potentially tricky.

Rajapaksa was set to meet with party leaders later Thursday as more names have been suggested for the post of prime minister, an official close to the negotiations told AFP. 

However, Wickremesinghe has already been working closely with Rajapaksa to shake up the finance ministry and the central bank to make sweeping fiscal and monetary policy changes, the source said. 

The central bank almost doubled key interest rates and announced a default on Sri Lanka’s $51-billion external debt as part of the policy shift, officials said. 

Front-line opposition legislator Harin Fernando from the SJB said he decided to remain neutral because SJB leader Sajith Premadasa refused to form a government as long as Rajapaksa remained president. 

“We can’t be imposing conditions that cannot be fully met. First, we must address the economic crisis. We need at least $85 million a week to finance essential imports. We must collectively find a way to raise this money urgently,” Fernando said. 

He said he expected a unity government to be formed on either Thursday or Friday. “We can’t wait any longer,” he added.

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Iraq strikes deal with Iran to secure summer gas imports

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Iraq depends on imports from neighbouring Iran for a third of its gas needs
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Iraq has agreed to pay $1.6 billion in debt to Iran by June 1 to secure a steady gas supply for power generation through the summer, its electricity minister said.

Chronic underinvestment through decades of war and sanctions has left Iraq dependent on imports from its eastern neighbour for a third of its gas needs.

But US sanctions on Iranian oil and gas have complicated Iraq’s payments for the imports, leaving it in heavy arrears and prompting Iran to respond by periodically switching off the taps.

The result has been extended power cuts across much of the country, particularly during the summer, when temperatures routinely reach 52 degrees Celsius (126 degrees Fahrenheit) sending demand for refrigeration and air conditioning soaring. 

“We have reached agreement on supply in sufficient quantities. We have agreed on 50 million cubic metres (per day) during the four summer months,” acting electricity minister Adel Karim told state television late Wednesday.

During winter, Iraq will import between 10 million and 20 million cubic metres per day of Iranian gas, he added.

“They agreed to supply us with the gas but they had conditions. They are demanding… $1.6 billion,” Karim said, adding the payment will have to be made “by the start of June”.

The figure represents Iraq’s arrears for 2020, which have yet to be settled because of the arcane payment method Iraq is obliged to use to comply with an exemption from US sanctions on Iran.

Iraq is not allowed to simply hand over cash to Iran. Payments must be used to fund imports of food and medicines.

Karim said gas imports from Iran are currently flowing at 38 million cubic metres per day.

Alternatives under consideration include a connection to the Turkish national grid to supply electricity to Iraq’s second city Mosul and a link to Kuwait and Saudi Arabia to help power the south.

Karim said imports of liquefied natural gas were also expected to begin from Qatar in the “next few months” but underlined that no alternative source was likely to replace Iranian gas soon.

“In my humble opinion we will depend on Iranian gas for five or 10 years to come,” he said.

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