The Ukrainian crisis undermines the strategy to revive tea and tourism in Sri Lanka

Sri Lanka faces a growing debt crisis after Russia’s invasion of Ukraine destroyed two of its biggest tourist markets, with analysts warning that the economic fallout from the conflict has raised default risks. payment.

The South Asian island has struggled for months with power cuts and shortages as its depleted foreign exchange reserves leave it struggling to import oil and other essentials. It has about $7 billion in foreign debt and interest payments due this year.

The government of President Gotabaya Rajapaksa has argued that a boost in tourism and exports would help Sri Lanka rebuild its foreign exchange reserves and weather the crisis.

Two countries played an essential role in this strategy: Russia and Ukraine, respectively the first and third tourist markets this year. Russia is also the second largest market for Sri Lankan tea, the country’s main export product.

Disrupted trade and tourism, along with soaring global oil prices, have dealt a fatal blow to that strategy, said Murtaza Jafferjee, chairman of the Advocata Institute think tank. “The economic crisis was already at its height, leading to this [war],” he said. That “has now extinguished all hope.”

Sri Lanka, Asia’s largest issuer of high-yield bonds, owes about $45 billion in long-term debt and several rating downgrades, following tax cuts and a collapse in tourism because of Covid-19, prevented it from refinancing. It now risks joining countries like Zambia and Belize in default during the pandemic.

Colombo had foreign exchange liabilities of $1.8 billion for February and March and usable reserves of less than $1 billion, according to estimates by central bank data analysts.

The fallout from the conflict is an unwelcome twist as authorities have become dependent on tourists from Russia and Ukraine, with traffic from India and Western Europe disrupted by Covid-19 travel restrictions.

Sri Lankan tea producers are concerned about the effects of a weaker ruble in Russia, a major tea market © Bloomberg

Around 20,000 Russians and Ukrainians visited Sri Lanka in January, accounting for more than a quarter of visitors, according to the Sri Lanka Tourism Development Authority. In January 2018, they represented less than 10%.

As Ukrainian airspace is closed, industry players fear economic disruption will also weigh on visits from Russia.

“Tourists from Ukraine and Russia were arriving in significant numbers while arrivals from other countries had plummeted,” said Shanthikumar, who heads the Sri Lanka Hotel Association. “Their absence now due to the war could again cause a huge crisis.”

Jayampathy Molligoda, chairman of the Sri Lanka Tea Board, added that a protracted dispute would have a “serious” impact on the tea trade if the ruble weakens and Russian banks are unable to use the system. Swift.

The economic crisis has grown increasingly painful for Sri Lankans, with hours-long power cuts and soaring inflation prompting the central bank to raise interest rates last week.

Rajapaksa’s government has pledged to end power cuts, signing a supply deal with state-owned Indian Oil Corp, according to Reuters.

But many investors believe it is only a matter of time before Sri Lanka can repay. A $1 billion sovereign bond is due in July, while analysts estimate Sri Lanka owes India up to $1 billion this month in deferred payments through the Asian Clearing Union.

For the hundreds of Ukrainian tourists stranded in Sri Lanka, their holidays have turned into a nightmare.

Dmytro Cherednyk and Oleksandra Kovalova, a couple in their twenties who visited the southern resorts of Sri Lanka, watched helplessly as their families fled to Kiev. “Hopefully this will end soon so we can reunite with our families,” Cherednyk said.

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