The Maldives and Sri Lanka, two tropical islands heavily dependent on tourism, have seen the pandemic devastate their economies and finances. Public debt this year is expected to linger above 100% of gross domestic product in the two small Indian Ocean countries. Unsurprisingly, the two have similar – and equally poor – credit scores. A default by CCC-rated borrowers is a “real possibility” on the Fitch Ratings scale.

And yet the Maldives appear to be taking a turn in visitor arrivals, with figures last month surpassing the August 2019 figure. Sri Lanka, where a deadly Easter Sunday suicide bombing two years ago hit tourism even before the pandemic, is falling behind.

With a population of barely half a million, the Maldives have been hit hard by the delta variant. In May, the virus infected nearly three in 1,000 people in a single day. Sri Lanka, home to 21 million people, saw a more manageable peak in comparison, peaking at a 7-day average of just under 6,000 new cases in late August. That’s 0.28 new infections for a thousand people.

Since then, the Covid-19 has declined and the country is on track to cover 60% of its population with the two doses of vaccine required by the end of the month. Among other popular beach destinations, Mauritius, which reached this milestone at the end of last month, is optimistic about a recovery in its leisure industry. With luck and the re-establishment of international air links, winter could also attract more vacationers to Sri Lanka’s sandy beaches. However, will this be enough to offset a 99.6% drop in tourism revenues compared to the pre-pandemic level? Clearly no.

But that’s not the only problem. It doesn’t help that the 9% drop in the Sri Lankan rupee since the start of the pandemic – a depreciation that could make tourist towns like Galle and Kandy cheaper for vaccinated travelers from India – also fueled a food crisis. Amid a severe shortage of imported rice, sugar, milk, pulses and grains, President Gotabaya Rajapaksa announced a state of economic emergency from August 31 and appointed an army officer Commissioner General of Essential Services, a telltale sign that food queues are getting serious.

At least they’re serious enough that Finance Minister Basil Rajapaksa, one of the president’s many brothers in the cabinet, replaces the central bank chief. Ajith Nivard Cabraal, who was governor between 2006 and early 2015, returns to his old job to find money. After paying off $ 1 billion in foreign exchange reserve debt in July, the $ 3.55 billion jackpot can barely cover two months of imports. In addition, $ 3.65 billion in repayments will fall due next year on hard currency borrowings. If Cabraal has a magic wand, he has to wave it now – or Sri Lanka will have to ask for a bailout from the International Monetary Fund.

Tea, the country’s most famous export, could have helped cushion the blow. But the product that grossed $ 1.2 billion last year is facing its own crisis due to the government’s sudden decision to get rid of chemical fertilizers. The industry probably cannot find enough new niche organic tea buyers to offset a tripling of the cost of production. Experts warn that crop diseases could lead to unmitigated disasters like in 1869, when the island’s then important coffee plantations were wiped out by a fungal infection.

Colombo couldn’t have found a worse time to return to the 19th century. The country’s share of the world’s best sellers of the beverage has been declining for some time. Rivals who manage to draw more customers away from Ceylon tea will not let them go in a hurry. That’s not all. Even with the spraying of vegetable crops, the ban on fertilizer imports is untenable. However, the decision to overturn it was abandoned.

The Rajapaksa administration does not want to appear politically weak by changing its mind. Or maybe he knows Sri Lanka won’t need to go to the IMF. Since the start of the pandemic, a warm relationship with China has helped the president secure a $ 1 billion loan, in addition to a $ 1.5 billion swap facility with China’s central bank and ‘a donation of 600,000 vaccines. Colombo could ask Beijing for help again, automatically putting some pressure on its neighbor next door.

With a government debt-to-GDP ratio of around 90%, India’s finances are little better than those of the Maldives and Sri Lanka, although a large and diverse economy gives it much greater influence with investors. – and a (barely) superior credit rating.

While aware of the economic problems looming at its south-eastern tip, India has long delayed a decision on Colombo’s request for a moratorium on loan repayments. After watching its $ 3 billion investment in Afghanistan go up in smoke, New Delhi’s appetite for economic diplomacy may even be weaker than usual. Still, trapped in debt, a previous Sri Lankan government sold the Port of Hambantota to China Merchants Port Holdings Co. To block other Beijing-backed enclaves at its doorstep, New Delhi could be forced to pull out its checkbook. .

A deepening economic crisis narrows Rajapaksa’s options, but the president is not yet out of cards.


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