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Sri Lanka’s Mishandling of Debt and Crisis

Sri Lanka, a once hailed low-income country development success story in the 1970s, is currently embroiled in the worst financial and economic crisis since its independence in 1948. Despite notable investments in infrastructure projects and a broadly stable growth rate from 2013 to 2019, the Sri Lankan story was marred by several prematurely managed economic measures that resulted in the current meltdown. On top of that, the COVID-19 pandemic and the ongoing tension between Ukraine and Russia, among many external influences, have further magnified the disaster. The island nation's crisis gained more attention when the cost of essential commodities such as food grains increased sharply parallel with fuel and oil scarcity - ultimately leading to lengthy power outages throughout the nation. On Monday (6/20), the crisis forced the nation to take measures to conserve its almost-empty fuel reserves by closing its schools and halting non-essential government operations for two weeks. The leading cause of this situation is the government's insolvency and inability to pay off its foreign debts. The government of Sri Lanka has accrued US$51 billion (£39 billion) in foreign debt. Sri Lanka will have to pay US$7 billion (£5.4 billion) in 2022 to pay off these debts, and subsequent years will require equal payments. Power and Energy Minister, Kanchana Wijeseker, clarified that Sri Lanka cannot pay suppliers US$725 million in past-due payments and is having difficulty opening letters of credit for upcoming shipments. Since Sri Lanka's foreign exchange reserves are almost entirely depleted, it can no longer afford to import essential commodities to fulfill its domestic market demands.

In resemblance to Sri Lanka’s bankruptcy, some countries have previously dealt with a similar crisis. For instance, in August 1982, Mexico could not service its US$86 billion debt, with US$21 billion in interest as well. Following the default, the US provided emergency loans, and the IMF allowed aid in exchange for structural economic reforms. Six years later, in August 1998, by the same token Russia proclaimed a de facto devaluation of the ruble, put a 90-day hold on paying down its foreign debt, and stopped making domestic debt payments. Its total external debt is US$141 billion, while Fitch Ratings pegs its internal debt at US$50.6 billion. As a result of the knock-on effects of the Asian financial crisis, the value of a significant Russian export was diminished as speculators attacked the ruble. It took more than a decade before Russia could once again borrow money on global markets. Similar crisis reoccurred in June 2015 where Greece was the first developed country to stop making payments on its debt to the IMF. It missed a €1.5 billion repayment, and two weeks later missed its second repayment of €456 million. A short-term emergency loan from a European Union crisis fund helped pay off the debt. A bailout of €86 billion was approved in August 2015 after Greek lawmakers agreed to tough austerity measures and reforms. Furthermore, in November 2017, Venezuela, the world’s largest oil reserves, was declared partially default by Fitch and S&P Global Ratings and in May 2020, Argentina became one of the latest countries to default and, for the ninth time in its history, incapable of paying a US$500 million debt.

Reflecting on past resolvents, the importance of foreign aid still requires a country's management alteration to conquer the crisis. On June 21, 2022, the US Government announced the third tranche of this new funding to help the people hardest hit by the economic crisis in Sri Lanka. In the short term, a total of US$5.75 million in humanitarian assistance could directly support those affected by the crisis. While in the long term, the US plans to add to its ongoing significant investment and aid projects in Sri Lanka. In addition, this assistance will provide community-based disaster management committees to help resolve the crisis. Furthermore, India has been a significant backer during the financial crisis and has provided about $3 billion in aid, including a US$1 billion credit line for essential imports and a US$400 million swap. Australia will also provide US$22 million for emergency food aid and US$23 million in development assistance to Sri Lanka. It aims to support healthcare and economic recovery with a strong emphasis on protecting those at risk. In the short term, those foreign aids are distributed according to their use. Since its advent, the International Monetary Fund team has been discussing a bailout program for Sri Lanka, an economic program that can be supported by global lender lending arrangements for countries in need. In brief, these aids and the IMF visit, overlapping with debt restructuring talks, can result in a deal for them to survive and keep afloat.



CNN Worldbank

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