Sri Lanka’s sovereign debt problem
Colombo’s insistence on not receiving IMF support raises serious concern among investors, lenders and other economic actors that Sri Lanka will maintain sufficient foreign reserves to meet its obligations to repay foreign debt. International rating agencies have expressed fears that Sri Lanka will be able to service its huge foreign debt, and the country’s foreign exchange reserves have suffered strongly over the last year. The Central Bank of Sri Lanka announced that the public debt has risen from 8.68% of GDP in the previous year to 10.1% of GDP, underscoring the country’s debt crisis.
Sri Lanka’s ultra nationalist government is likely to receive a financial survival weapon from China and the International Monetary Fund to avoid defaults on foreign debt, confirming China as the lender of last resort for the strategically located South Asian island nation. The debt to China which accounts for 10 percent of Sri Lanka’s foreign debt has a grace period of five years and a 15 year payment period.
Sri Lanka’s debt crisis has been accompanied by a larger balance-of-payments crisis, as its trade revenues have been hampered by protectionism and the pandemic, while payments for its foreign debt have soared. A growing discrepancy between foreign exchange inflows and outflows has caused Sri Lanka’s foreign-exchange reserves to dry up and forced the government to issue ISBs to meet massive debt repayments.
In the early 1990s, most of Sri Lanka’s foreign debt consisted of discounted loans, mostly provided by multilateral and bilateral development organizations such as the World Bank, the Asian Development Bank and the Japan International Cooperation Agency (JICA). In a report to the East Asia Forum, Sri Lankan central bank said it intended to raise an additional $5 billion of loans but had not yet received the funds and the IMF seal of approval as the debt trap grew worse. In this sense Sri Lanka’s external debt problem is not only a debt problem – one but also a complex macroeconomic and political problem, including international trade and investment by the countries that form its BOP.
Various interim solutions to the debt crisis have been proposed, such as offering debt swaps to countries such as China to whom Sri Lanka owes large debts, privatizations, direct sales at a loss, or taking out state-owned enterprises without high interest rates. World-renowned investment banking and securities management firm Goldman Sachs has considered three options for Sri Lanka’s current medium-term debt crisis.
In exchange for urgently needed currency ($ 1 billion) to help help service its debt, Sri Lanka will enter into a partnership with China to own and operate the port of Hambantota under a 99-year lease.
Sri Lanka, faced with dwindling foreign exchange reserves, has cut imports of agricultural chemicals, cars and its staple turmeric, hampered its ability to repay its massive debt as it struggles to recover from the pandemic. Sri Lanka’s central bank sought to ease fears of a default last week in a statement, calling speculation “baseless” and vowing that the new government would meet its debt-service obligations over the period.
Sri Lanka announced that it would increase its foreign exchange reserves as part of the payment of a $1 billion bond due in July this month to atone for investors’ fears about a possible default. In an analysis of Sri Lanka’s debt sustainability challenges published last week, Goldman Sachs said that the country has one of the highest dollar spreads among EM countries and that political uncertainty and the significant impact of COVID-19 could lead to a deterioration of external vulnerability of the country and a multi-stage credit upgrade. Sri Lanka runs a current account deficit of about $18 billion, which means that it spends more foreign exchange on importing goods than it earns from exporting foreign exchange.
LONDON (Reuters) – Sri Lanka’s finances are so fragile that economists say the country had already secured help from allies such as China before the first strike against the coronavirus and is now appealing again to the IMF not to service its debt. Since Sri Lanka was upgraded to a medium-income country in 2009, the ability of governments to access foreign markets has declined, leading them to withdraw from international capital markets and issue international government bonds (ISBs). While such an “independent financing agreement” with South Korea, worth roughly the same amount, would be helpful in the long run, such arrangements add to existing debt as an economic crisis looms, as commodity prices soar, leaving the country with little money.
The country’s foreign exchange reserves have dwindled to only enough to cover three months of imports at a time when high repayments on its foreign debt are due, straining the country’s financial system. At this point, Colombo is in a prolonged debt crisis, and Fitch Ratings has shown that it needs to raise $29 billion by 2026 to service the debt repayment. Sri Lanka will have to repay a total of $3.7 billion in foreign debt this year, having already paid $1.3 billion.
The steep payments on international bonds, which account for 40 percent of the country’s foreign debt, have left Sirisena’s government in dire fiscal straits. In December alone, the foreign debt stood at $3.2 billion.
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