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The Collapse Of The Sri Lankan Economy
Sri Lanka has been on the brink of bankruptcy since May 2022. The nation is experiencing its worst economic crisis due to insufficient foreign currency to pay for even the most basic imports, such as food, fuel, and medication.
What went wrong?
The virtually insolvent nation experienced a severe foreign currency crisis that led to a default on its foreign debt obligations in April. It would postpone paying back nearly USD 7 billion of its estimated USD 25 billion in outstanding foreign debt until 2026. In totality, USD 51 billion are owed by Sri Lanka to its international creditors.
Steps taken by the Sri Lankan Government
The President stated that to solve the problem, USD 70 million from the World Bank and USD 20 million from Sri Lankan government funds will be used to purchase 100,000 MT of gas.
The country defaulted on its debt obligations in April and turned to the IMF for assistance. The IMF has requested that Colombo increase taxes and reorganise state-owned businesses that are losing money. The negotiations have been in place with the IMF regarding a bailout.
According to Sri Lankan and IMF officials, a financial rescue plan won’t be anticipated until Colombo agrees with its creditors on restructuring its USD 51 billion foreign debt, a process that might take months.
The resulting unrest
Prolonged power outages and record-high inflation in Sri Lanka have fueled months of protests and rallies, some of which have also turned violent. The demand is for President Gotabaya Rajapaksa to resign.
Tens of thousands of students demonstrated in Colombo, chanting “Gota go home” in reference to the President, whom they hold responsible for incompetence and corruption. Some of these student activists have also been arrested.
Since January, India has assisted with its credit lines to stabilise the economic conditions, amounting to USD 4 million. However, this support is also limited as this loan assistance will have to be paid back.
Australia has also extended monetary assistance to the impoverished nation to the tune of USD 35 million for urgent food and healthcare needs.
Article written by Advaita Kapoor
Fashion In Crisis
With reports last week of the UK economy shrinking for the second consecutive month, large fashion retailers are struggling.
Online fashion retailer ASOS triggered a profit warning last week, pushing its shares down by 32.5%. Chief Operating Officer, Matt Dunn, suggested that this could be due to increased levels of customer returns. Cost of living pressures have altered customer behaviour and resulted in customers returning goods they can no longer afford.
Matt Dunn pinpoints the slowing profits to a customer demographic ages 16-34 years old. Dunn argues that inflationary measures will hit this demographic the hardest, as they are lower earners than older shoppers and tend to have more financial burdens.
At present, roughly 25-30% of their orders are returned. Arguably, this is due to a ‘free returns’ policy which ASOS believes is a ‘core part’ of their offer. A ‘free returns’ policy is not implemented by many of their rivals and is left open to widespread abuse.
In 2019, ASOS launched a new policy to block so-called serial returners. Customers were previously afforded 90 days to return items, but in 2019 this was halved. However, many experts have suggested that ASOS must go further and scrap its free returns policy.
Last week, ASOS announced its expected profits to be between £20-60 million this year. These figures are comparable to City analysts expecting pre-tax earnings of between £63 and 104 million. Does Asos need to rethink its returns policy to boost profit and keep customers and shareholders happy? Given the sharp rise in fuel and shipping costs, it may be time to follow well-known brands such as Zara and introduces charges for customer returns.
In May, another online fashion retailer, Missguided, which owed millions of pounds, appointed administrators after it was issued a winding-up petition by its suppliers. The Times reported that Missguided had run out of cash following the supply chain crisis along with rising costs in shipping and online advertising.
These are common issues faced by most e-commerce businesses at present. Missguided has had a turbulent year. In 2021 the company struggled to make a profit and was rescued by Alteri Investors, a private equity investment company. In early June, Frasers Group bought Missguided out of administration for £20 million. This move happened after fashion rival Boohoo failed to close a takeover deal.
However, despite poor sales growth and declining profits amongst its rivals, Boohoo has reported growing sales. Despite shares in Boohoo falling by 11.3%, John Lyttle, chief executive, has highlighted its UK sales were up an impressive 94% compared to before the pandemic. Boohoo has also reportedly begun considering the introduction of customer return charges.
In an attempt to reassure investors, COO Neil Catto suggested Boohoo’s growth was organic and not reliant on their recent acquisitions of several high street fashion brands such as Debenham, Warehouse and Karen Millen.
However, could this positive news about UK fashion sales be a distraction from its poor international performance? For example, US sales are reportedly down 28% this quarter, and US sales continue to be crushed by global shipping delays, an issue in Autumn 2021.
With worries about an upcoming recession, it will be interesting to see how fast-fashion and online retailers survive.