Crack Grade B 1

GLOBAL ECONOMIC ISSUES

SILICON VALLEY BANK (SVB) CRISIS
SVB was founded in 1983 and was the 16th largest U.S. bank before its collapse. They
specialized in financing and banking for venture capital-backed startup companies - mostly
technology companies.

Venture capital firms did business there as well as several tech executives. Based in Silicon
Valley, SVB had assets totaling $209 billion at the end of 2022, according to the Federal Deposit
Insurance Corporation (FDIC)

Importance of SVB for the tech sector

SVB provided financing for about half of all U.S. venture-backed technology and healthcare
companies. SVB was a preferred bank for the tech sector because they supported startup
companies that not all banks would accept due to higher risks.

The pandemic in 2020 was a hot market for tech companies as consumers spent big money
on digital services and electronics. Tech companies had a large influx of cash, and SVB's services
were needed during this time to hold their cash for business expenses, such as payroll. The
bank invested much of these deposits as banks typically do.

SVB Collapse Reasons

The collapse happened for multiple reasons, including a lack of diversification and a classic bank
run, where many customers withdrew their deposits simultaneously due to fears of the bank's
solvency.

Lack of Diversification

Silicon Valley Bank saw massive growth between 2019 and 2022, which resulted in it having a
significant amount of deposits and assets. While a small amount of those deposits were held in
cash, most of the excess was used to buy Treasury bonds and other long-term debts. These
assets tend to have relatively low returns but also relatively low risk.

But as the Federal Reserve increased interest rates in response to high inflation, Silicon Valley
Bank’s bonds became riskier investments. Because investors could buy bonds at higher interest
rates, Silicon Valley Bank’s bonds declined in value.

As this was happening, some of Silicon Valley Bank’s customers—many of whom are in the
technology industry—hit financial troubles, and many began to withdraw funds from their
accounts.

To accommodate these large withdrawals, Silicon Valley Bank decided to sell some of its
investments, but those sales came at a loss. SVB lost $1.8 billion, and that marked the
beginning of the end for the bank.

Bank Run

When SVB announced their $1.75 billion capital raising on March 8, people became alarmed the
bank was short on capital. Word spread quickly on social media accounts such as Twitter and
WhatsApp inducing panic that the bank didn’t have enough funds. Customers started to
withdraw money in waves. SVB's stock plummeted by 60% on March 9 after its capital raising
announcement. Some people are saying the bank run was Twitter-fueled.

www.crackgradeb.com | crackgradeb@gmail.com | 9310558455

 Crack Grade B 2
California regulators shut the bank down on March 10 and placed SVB under the FDIC.

Unlike personal banking, SVB's clients had much larger accounts. It didn't take long for money
to diminish during the bank run, with the escalating pace of withdrawals causing a snowball
effect. Most customers had deposits more than the $250,000 FDIC limit.

Many startups left money in their SVB primary account instead of using other accounts - such
as a money market - to pay expenditures. This means most of their working capital was mainly
in their SVB account, and they needed access to their deposits for payroll and bills.

Reasons as per the Federal Reserve Report

In a report issued on April 28, 2023, the Federal Reserve formally attributed blame for the
bank's failure to SVB's senior management team for mismanaging the investment risk of their
balance sheet as well as the board of directors for not performing its duty as a check on senior
management.

Additionally, the Fed also attributed some responsibility to its own regulatory officials for not
recognizing the bank's vulnerabilities as it rapidly grew between 2019 and 2021 and for not
acting on significant problems it did identify related to risk management before the bank failed.

The Fed also cited the 2018 change in Fed supervisory standards and the impact of social media
with a highly networked and concentrated depositor base as contributing factors.

Counter-Measures taken by the Fed

The FDIC insures bank deposits of up to $250,000 per depositor per bank for each account
category. In other words, if you had $250,000 in a Silicon Valley Bank account, you would get
all of your money back.

Unfortunately, most of the accounts in Silicon Valley Bank held more than $250,000 of deposits,
meaning most of the funds were uninsured.

In most cases, this would mean account holders would lose any money above that threshold.

To help, the Federal Reserve announced on March 12 that it would invoke a systemic risk
exception, meaning that all depositors would be made whole, even for those funds that were
uninsured.

However, investors won’t be so lucky. While the FDIC can protect depositors from losses, it can’t
do the same for shareholders and unsecured debt holders. In other words, individuals and
institutions that owned stock in SVB Financial Group may not get their money back.

As a result of the Silicon Valley Bank collapse, the government announced the Bank Term
Funding Program (BTFP), a program authorized by the Federal Reserve that offers loans to
banks, credit unions, and other deposit institutions.

These loans, which can last for up to one year, help financial institutions to meet their
depositors' needs. The program also helps to ensure that, when banks need cash, they won’t be
forced to quickly sell high-quality securities to get it.

Impact on India
Post Federal Reserve plan to allow depositors to withdraw $250,000, Indian startups felt a sense
of relief because they can now shift their stuck money into other US Banks. Minister of
Electronics and Information Technology mentioned that Indian startups had roughly $1 bn
funds parked in SVB before crisis.

With Indian startups facing funding winter and increased layoffs, the collapse of Silicon Valley
Bank comes with various issues including -

www.crackgradeb.com | crackgradeb@gmail.com | 9310558455

 Crack Grade B 3
- Uncertain financial environment impacts the starting of new projects. Wedbush Securities
in its report stated similar views and stressed that deals from the Banking, Financial
Services, and Insurance (BFSI) and 'High Tech' sectors might slow down in light of the
collapse. The BFSI sector contributes up to 40 per cent to the Indian IT sector’s revenues.
- Cost pressure might increase amidst funding winter. This will result in increased
outsourcing and further negotiation of existing contracts
- Increased usage of AI tools to reduce the impact on margins. This will result in increased
layoffs in the industry.

Other Bank Failures

Signature Bank
In short, the failure of Silicon Valley Bank led to a Signature bank run on Friday, March 10,
2023. Depositors panicked after SVB failed because Signature had high amounts of uninsured
deposits and was exposed to the crypto sector.

New York state and U.S. federal regulators were also concerned—with 24/7 online banking, plus
social media, the run was continuing over the weekend. On Sunday, March 12, 2023, the New
York State DFS took possession of the bank “in order to protect depositors” and named the FDIC
as receiver.

They announced that there was a plan to make sure all depositors were protected, even those
with uninsured deposits.

FDIC Report on Signature Bank’s failure

In late April, the FDIC issued a report on Signature Bank’s failure, concluding that the root
cause was "poor management," namely:

 Management failure to understand the risks of its concentration in the crypto sector.
 An abnormally large share of uninsured deposits: Signature Bank reported $79.5 billion
in estimated uninsured deposits as of December 2022—meaning about 90% of all its
deposits were uninsured.
 Liquidity risk: The FDIC said the bank's poor governance and risk management made the
bank unable to manage its liquidity in a time of stress.
 Although Signature had enough reserves to comply with regulatory requirements, as
Vidhura S. Tennekoon, assistant professor of economics at Indiana University, pointed
out, only about 5% of its assets were in cash, compared to an industry average of 13%.
 Lack of adequate FDIC oversight: The report admitted to the FDIC's own shortcomings in
conducting certain timely reviews of Signature Bank, blaming a staffing shortage. But it
also said the bank didn't respond quickly to concerns and recommendations it did make.

Federal Reserve took similar steps as was taken in SVB crisis to safeguard the depositors and
protect the bank from failing. These include making all depositors of the signature bank as
whole, creating a Bank Term Funding Program to offer loans to depository institutions, and
allowing depositors to withdraw their funds upto FDIC insured-deposit limit of $250,000.

Credit Suisse Bank

Credit Suisse, the second-largest bank in Switzerland, collapsed in March 2023 and was bought
by rival UBS for 3 billion CHF (about $3.3 billion USD). Credit Suisse, one of Switzerland’s
leading financial institutions since its predecessor Schweizerische Kreditanstalt was founded in
1856, was among a group of 30 banks known as globally systematically important, and a full
collapse might have devastated the global financial system.

Credit Suisse faced numerous scandals in recent years, including a spying scandal, the collapse
of two investment funds in which the bank was heavily involved, and a rotating group of
executives.
www.crackgradeb.com | crackgradeb@gmail.com | 9310558455
 Crack Grade B 4
Immediately prior to Credit Suisse’s collapse, two U.S. banks—Silicon Valley Bank and Signature
Bank—also collapsed, sending shock waves through the global financial system. UBS plans to
sell off parts of Credit Suisse in the coming months and years. The impact on Switzerland’s
reputation as a global banking hub and a stable financial center may be significant.

(References – Indian Express/Business Standard/TechTarget/Investopedia)

www.crackgradeb.com | crackgradeb@gmail.com | 9310558455

 Crack Grade B 5
US DEBT CEILING CRISIS
The debt ceiling, or debt limit, is the total amount the US government is allowed to borrow to
finance its expenditure, such as paying salaries and welfare allowances.

History
The debt limit was introduced in 1917, when the US entered World War I. Constitutionally,
Congress controls the government’s purse strings. The debt ceiling was introduced in order to
make it easier for the executive to operate without having to turn to Congress every time it
wanted to spend — it allowed the government to borrow as required as long as it kept under the
debt limit approved by Congress.

According to the Treasury Department website, since 1960, “Congress has acted 78 separate
times to permanently raise, temporarily extend, or revise the definition of the debt limit — 49
times under Republican presidents and 29 times under Democratic presidents.” The most recent
raising was in 2021.

Earlier, this limit was at $31.4 trillion. The Republicans, who have a majority in the House
refused to raise it unless the Democrat-run government agreed to their demands, which included
a significant cut in spending.

Impact if US defaults
Naturally, the US’s credit rating would be downgraded, making future borrowing more expensive.
The government would no longer have the money to function, and would have to decide who gets
salaries, and how much.

Yellen, US Secretary of the Treasury, in a letter to McCarthy on May 22, said, “If Congress fails
to increase the debt limit, it would cause severe hardship to American families, harm our global
leadership position, and raise questions about our ability to defend our national security
interests.”

This will weaken the Dollar, causing stock market to collapse, and millions might lose their job.

Resolution
The US House of Representatives passed a bill to suspend the $31.4 trillion debt ceiling on May
31. Under the deal struck earlier by Biden and McCarthy,

- The $31.4 trillion debt ceiling will be suspended until January 2025. Till then, the
government can keep borrowing to fund itself.
- In return, the White House has agreed to cap non-defence discretionary spending at 2023
levels in 2024, and increase it by 1% the year after.
- The agreement keeps non-defence spending flat next year, with a 1% rise in 2025

[References – Indian Express]

www.crackgradeb.com | crackgradeb@gmail.com | 9310558455

 Crack Grade B 6
GLOBAL RECESSION
2023 is expected to be the third-worst year for global economic growth this century behind 2009,
when the global financial crisis caused the Great Recession, and 2020 when COVID-19
lockdowns brought the global economy to a virtual standstill.

Analysts expect the world's major economies, including the United States and the United
Kingdom, as well as the eurozone, to slip into a recession this year as central banks continue
raising interest rates to temper demand for consumer goods and services in an effort to rein in
raging inflation.

The head of International Monetary Fund, Kristalina Georgieva, has warned that a third of the
global economy could be hit by a recession in 2023, which she described as a "tougher" year
than 2022.

What is Recession?
A recession is a significant, widespread, and prolonged downturn in economic activity. A
common rule of thumb is that two consecutive quarters of negative gross domestic product
(GDP) growth mean recession.

Major Reasons behind the imminent Recession

COVID-19: The successive waves of the COVID-19 pandemic and the subsequent global
lockdown led to the major economic slowdown across the globe. The pandemic took a toll
especially on the contact-intensive industries, forcing them to go for closure amidst no business.
India’s GDP shrank by 7.3% in 2020-21, fiscal deficit zoomed to 9.5%, and the resulting
economic slowdown increased the ever-growing inequality in India.

Russia Ukraine Conflict: The conflict triggered a swing in commodity prices, disrupted supply
chains. It resulted into increased inflationary pressures. Global inflation surged to 8.7 per cent
from 4.7 per cent in 2021, overshooting targets in the majority of countries through the year.
Global trade (goods and services) growth slowed from 10.4 per cent in 2021 to 5.1 per cent in
2022, reflecting the post-pandemic slowdown in global demand and the restrictions on cross-
border movements of goods and services imposed by the war in Ukraine

High Inflation: Opening up of the economy and the conflict in Europe resulted into high
demand-based and supply-based inflation. In India, Retail inflation based on the Combined Price
Index (Combined) had risen to 6.95 percent in March 2022 from 6.07 percent in February 2022
and then stayed above 7 percent-mark during April-June 2022. Consequently, the Reserve Bank
of India started increasing Repo Rate to curb the inflation.

Monetary Tightening: A generalized surge in global inflation triggered monetary policy actions
by central banks in the form of successive interest rate increases and the pulling back of
liquidity leading to tightening of financial conditions and together with other factors, a toll on
growth which slowed from 6.2 per cent in 2021 to 3.4 per cent in 2022, according to the
International Monetary Fund (IMF).

High Public Debt: Post the pandemic, most of the countries provided numerous liquidity
measures, by taking huge public and private debt. Waves of global spillovers to Emerging Market
Economies resulted in large currency depreciations, capital flight, investor risk aversion and
raised debt distress in some of them.

Muted World Trade: To protect their own economic space from the problems of high debt and
high current account deficit, nations have reduced their cross-border trade. WTO economists
predict global merchandise trade will grow by merely 1 percent in 2023, down sharply from last
year's 3.5-percent expansion. After a resilient performance in the first half of 2022, global trade
deteriorated in the second half of last year due to softening demand worldwide.

www.crackgradeb.com | crackgradeb@gmail.com | 9310558455

 Crack Grade B 7
Slowdown in CHINA: China's economy slowed down because it adopted a punishing zero-Covid
strategy and weakening global demand. Official growth figures confirm the contraction of the
Chinese economy. Being the world's second-largest economy, contraction of Chinese economy
increases the chances of a global recession.

Incidents of Recession
Germany

Germany has entered into a technical recession as German economy contracted in the first
quarter of 2023 compared with previous three months. Germany’s GDP fell consecutively for the
second time as in the previous quarter i.e., Q4 2022, it registered a 0.5% decline.

Household consumption was down 1.2% quarter-on-quarter after price adjustments.

Government spending also decreased significantly by 4.9%. However, Investment in machinery
and equipment increased by 3.2% compared with the previous quarter, while investment in
construction went up 3.9% on quarter. Exports rose 0.4%, while imports fell 0.9%.

A drop in purchasing power, thinned-out industrial order books, aggressive and synchronized
monetary policy tightening, and the expected slowdown of the U.S. economy have been
attributed as the reasons behind German economy entering into recession.

Eurozone Recession

Nearly two weeks after Europe’s largest economy and the world’s fourth largest, Germany, fell
into recession, the remaining 19 countries that are part of the Eurozone, too, have sunk into
recession.

The euro zone economy fell into a technical recession in the first three months of 2023, data
from the statistics agency Eurostat showed on Thursday, as signs emerge that central bank rate
hikes will weaken the region's future growth prospects.

Gross domestic product (GDP) for the 20-country euro zone fell by 0.1% in the first quarter
compared with the final quarter of 2022, when GDP also slipped by 0.1%, revised from a
previous reading of zero.

About Eurozone

The ‘Eurozone’ is a currency union of 20 member nations of the European Union that have
adopted the Euro as their primary currency and legal tender.

The list of countries that are part of the Eurozone includes Austria, Belgium, Croatia, Cyprus,
Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta,
the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

Impact of Global Recession on Indian Economy

Decline in Exports: Global demand slowdown on account of reduced economic growth will lead
to reduced exports from India. Recent reports suggests that recession in Germany will impact
Indian exports specifically in sectors like organic chemicals, machinery, electronics, apparel,
footwear, articles of iron and steel, and leather goods. In 2022, 4.4% of India’s total exports were
to Germany.

Decline in Foreign Investments: In a global economy with muted liquidity, foreign investors
tend to postpone their investments. This results into decline in foreign investments for India.
According to the annual report of the Reserve Bank of India (RBI), the total Foreign Direct
Investment (FDI) received by India in FY23 reached a three-year low of USD 46 billion. This
amount is 26% lower than the FDI recorded in the previous fiscal year (FY22), which was USD
58.8 billion.

www.crackgradeb.com | crackgradeb@gmail.com | 9310558455

 Crack Grade B 8
FPI Outflow: Amidst increased monetary policy tightening, there is a flight of capital from
developing economies towards developed economies. According to data compiled by the National
Securities Depository Limited, FPIs have pulled out a whopping Rs 255,879 crore ($33.5 billion)
from equity and Rs 16,621 crore ($2.1 billion) from debt segments of Indian financial markets,
for a total net outflow of Rs 2,71,950 crore ($35.6 billion) over the period October 2021 to June
2022.

Depreciation of Rupee: Persistent Interest rate hike by the Federal Reserve leads to increased
outflow of capital from the emerging economies. This leads to selling pressure on rupee
investments, thereby leading to depreciation of the currency. The Indian rupee depreciated by
around 10 per cent against the US dollar in 2022 on account of sharp appreciation of the
greenback, as the US Federal Reserve tightened its interest rate to check inflation amid the
uncertainties surrounding the Russia-Ukraine conflict.

Economic Slowdown: Decline in exports and investments due to external factors may bring a
fall in GDP.

However, India’s economy is resilient. According to a Bloomberg report, India has a zero percent
chance of recession in 2023. This reflects the resilience and strong macro-economic conditions of
the Indian economy.

Despite uncertainty in western economies, India is projected to have a real growth rate of 6-
6.8% in FY24 as per the Indian Economic Survey 2022-23. While this is on the lower side
when compared to FY23 (est. 7%) and FY22 (9.1%), the impact of the 2 shocks (the Russian-
Ukraine conflict, and countermeasures to curb inflation) should not be disregarded. Even at 6%,
India will be one of the world’s fastest-growing large economies.

More Dependence on Internal Consumption Rather than Exports

India’s foreign exports constitute only a fifth of the country’s total GDP, making the impact of an
economic slowdown in western countries not as drastic. India’s economy is further safeguarded
due to the diversified nature of its exports, both geographically, and in terms of the
products/services it sells, making it less vulnerable to concentrated economic shocks.

Another driving factor behind India’s growth is the country’s population of 1.4 billion and its
demographics. India is home to a relatively young population, with 26% below 14 years and
67% between 15-64 years approximately; starkly different from other countries in the developed
world. This core strength is the backbone behind the resilience and growth of India’s demand.
This ensures that the Indian consumer’s demand for goods and services will remain robust not
just for the next decade, but the next few decades.

Resilient Indian Banking System

Learning from the bitter consequences of large non-performing assets and limited capital base in
the past has helped Indian banks to currently be better placed to withstand stress. Strict
monitoring by the regulators, healthy asset quality, and reasonable capital levels have made
Indian banks far more resilient to economic downturns compared to their US counterparts.

According to the State Bank of India’s economic research report, when compared with other
major countries, India has the least foreign claims both as a counterparty and as a guarantor,
thus limiting the country’s exposure to global uncertainties.

Favorable Import Positioning

The adverse effects of the global slowdown are causing the prices of commodities like crude oil,
metal, and edible oil to dip. This is highly beneficial to India’s trade as an importer of these
commodities. The reduction in prices has helped counteract the reduction in exports aiding the
trade deficit as well.

www.crackgradeb.com | crackgradeb@gmail.com | 9310558455

 Crack Grade B 9
One particular commodity that India is vulnerable to is the price of oil, as the country imports
roughly 80% of its oil. In 2022, India struck a deal with Russia to buy crude oil at a significantly
discounted rate amidst the EU and US sanctions, helping India to moderate inflation as
compared to the western countries.

While there will definitely be an impact of the global slowdown on the Indian economy due to
current-day integrated economies, it will be far less as compared to western countries. Even with
the presence of global headwinds, one can feel better knowing that India is relatively well-
positioned to tackle any adverse effects the slowdown may cause.

www.crackgradeb.com | crackgradeb@gmail.com | 9310558455

 Crack Grade B 10
ECONOMIC CRISIS: INDIA’S NEIGHBOURHOOD
Pakistan Economic Collapse
Pakistan's economy has been unstable for long. The difference today is that it is now on the
brink of collapse. "Over the past two decades, Pakistan has achieved significant poverty
reduction, but human development outcomes have lagged, while economic growth has remained
volatile and slow," the World Bank said in its report released in October last year.

Reasons for Pakistan’s economic collapse

High Debt: According to the World Bank, Pakistan's total external debt stocks increased to
$130.433 billion by end-2021 from $115.695 by end-2020. The country's external debt reached
$126.9 billion in September 2022, CEIC data revealed. Right now, Pakistan's debt-to-GDP ratio
is in a danger zone of 70 percent, and 40-50 percent of government revenue is earmarked for
interest payments this year, Reuters reported. Out of Pakistan's $27 billion in bilateral debt,
around $23 billion is made up of Chinese loans.

Persistent Inflation: As per the Bloomberg report, Inflation in the country was at a 48-year-high
in January as thousands of containers of food items, raw materials and equipment are stuck in
ports after the cash-strapped government curtailed imports. It worsened to 27.55 percent
recently. Higher inflation tends to have a depressing effect on the value of a country's currency.
This is because increased inflation reduces the currency's buying power, which weakens it
against other currencies.

Weakening Currency: As per the country's central bank, the Pakistani rupee fell 9.6 percent
against the dollar on January 26 — the biggest one-day drop in over two decades — in a slump
that may persuade the International Monetary Fund to resume lending to the country. Pakistan
removed an artificial cap on the rupee, resulting in it losing 14.73 percent in interbank trading
during the last three trading sessions.

Depleting Foreign Exchange Reserves: In January 2023, Pakistan's foreign exchange reserves
dropped to $4.3 billion, the lowest since 2014. The State Bank of Pakistan also revealed that
commercial banks have $5.8 billion, totaling nearly $10.1 billion. Moreover, the total "liquid
foreign reserves held by the country stood at $9.45 billion as of January 20, 2023”.

Massive Power and Energy Shortage: Pakistan is highly import-dependent, particularly with
regard to energy, which renders it acutely vulnerable to hikes in global oil and gas prices. The
recent massive outage has added to the woes. Pakistan has enough installed power capacity, but
it lacks the resources to run its oil-and-gas-powered plants that are heavily in debt and cannot
afford to invest in infrastructure and power lines.

Flood Devastation: The World Bank said, "In early FY23, Pakistan’s economy was undergoing
an overdue adjustment, as it recovered from the impacts of COVID-19." However, the economic
impacts of the recent flood might have delayed the "much-needed economic adjustment." The
World Bank expects the growth in Pakistan's economy "to reach only around 2 percent in FY23."

What does the future hold for Pakistan?

The State Bank of Pakistan stated that the country needs $20 billion over the next 12 months to
make payments arising from debt obligations. Just $500 million of interest or 'coupon' payments
are due on Pakistan's international bonds this year, but the chief of the central bank chief has
said $3 billion is needed to meet overall external debt payments.

An IMF deal is what Pakistan needs. The cash-strapped country held its initial talks with the
IMF on January 31 in a bid to unlock stalled funds from a $7 billion bailout to ward off an
economic meltdown. However, IMF is likely to demand significant belt-tightening that is bound
to be unpopular, with voters already grappling with decades-high inflation and fewer job
prospects.
www.crackgradeb.com | crackgradeb@gmail.com | 9310558455
 Crack Grade B 11
Pakistan had secured a $6 billion IMF bailout in 2019, which was topped up with another $1
billion last year. This is the IMF's ninth review of its Extended Fund Facility, which is meant to
help countries facing a balance-of-payment crisis. The talks, to continue through February 9, are
meant to clear the IMF's 9th review of this Extended Fund Facility.

If the disbursements do not arrive by June, there could be a six-month gap before the new
government takes office, during which Pakistan would be starved of funds, effectively pushing its
population of 220 million to the brink.

Sri-Lanka Economic Collapse

Sri Lanka faced one of the most severe economic crises in its independent history. The roots of
the crisis lie in economic mismanagement, COVID-19 pandemic, and others. To prevent from
going bankrupt, Sri Lanka approached IMF for a bailout package.

Major Reasons behind the collapse

Economic mismanagement by successive governments created and sustained a twin deficit – a
budget shortfall alongside a current account deficit. “Sri Lanka is a classic twin deficits
economy,” said a 2019 Asian Development Bank working paper. “Twin deficits signal that a
country’s national expenditure exceeds its national income, and that its production of tradable
goods and services is inadequate.”

Unsustainable Electoral Promises: Latest crisis was accelerated by deep tax cuts promised by
Rajapaksa during a 2019 election campaign that were enacted months before the COVID-19
pandemic, which wiped out parts of Sri Lanka’s economy.

Depleting Foreign Exchange Reserves: With the country’s lucrative tourism industry and
foreign workers’ remittances sapped by the pandemic, credit ratings agencies moved to
downgrade Sri Lanka and effectively locked it out of international capital markets. In turn, Sri
Lanka’s debt management programme, which depended on accessing those markets, derailed
and foreign exchange reserves plummeted by almost 70 per cent in two years.

High Unsustainable levels of Debt: As of February 2022, the country was left with only $2.31
billion in its reserves but faces debt repayments of around $4 billion in 2022, including a $1
billion international sovereign bond (ISB) maturing in July. ISBs make up the largest share of Sri
Lanka’s foreign debt at $12.55 billion, with the Asian Development Bank, Japan and China
among the other major lenders.

In a review of the country’s economy released April 2022, the IMF said that public debt had risen
to “unsustainable levels” and foreign exchange reserves were insufficient for near-term debt
payments.

Fertilizer ban causing decreased agricultural output: The Rajapaksa government’s decision to
ban all chemical fertilizers in 2021, a move that was later reversed, also hit the country’s farm
sector and triggered a drop in the critical rice crop.

Resolution
Six months after Sri Lanka qualified for an International Monetary Fund (IMF) Extended Fund
Facility of $2.9 billion to tide over the worst economic crisis in its history, the IMF Board finally
signed off on the arrangement after receiving requisite financial assurances to restore debt
sustainability from the country’s biggest bilateral donors — China, India and Japan.

www.crackgradeb.com | crackgradeb@gmail.com | 9310558455