Sri Lanka’s Economy on a Line

Excessive foreign debt accumulation might be Sri Lanka’s economy’s last straw as the nation is preparing for “the worst economic crisis in decades”, the government said.

Over recent years, Sri Lanka has been accumulating a substantial amount of foreign debt: US $51 billion, which it mostly owes to creditors from market borrowings (47%), the Asian Development Bank (13%) and The People’s Republic of China (10%), as of last year. On Tuesday, this has culminated into Sri Lanka temporarily defaulting on its debts (meaning failing to make required repayments on a debt),  officials claimed. The Ministry of Finance has also added that the impact of the COVID-19 pandemic on top of the conflict in Ukraine has made it “impossible” to repay its debtors, the BBC reports. 

The island nation has recently suffered from a myriad of other internal problems, ranging from food shortages, to frequent electricity blackouts, fuel shortages and extremely high prices. This resulted in social unrest as civilians have taken to the streets to protest their ever worsening living conditions, demanding the current president to resign, claiming the crisis to be at his fault. Given the current situation, the government said that it will only take emergency measures as a “last resort in order to prevent further deterioration of the republic’s financial position.”

In the meantime, the government is due to open talks with the International Monetary Fund (commonly shortened to IMF), to discuss a possible loan to put the economy back on track. Sri Lanka’s government has also made an appeal to China and India individually for additional help dealing with the shortages.

Consequently, Fitch Ratings has lowered the assessment of the former British colony to near default, stating that “a sovereign default process has begun” and that the country’s paying capacity has been “irrevocably impaired.” Other credit rating agencies such as S&P also downgraded Sri Lanka “to reflect the virtual certainty of a default on some affected obligations.” 

Overall, the recent chain of events has put Sri Lanka’s economy on a line, which raises many questions over whether Sri Lanka could get out of this situation.

by Antonio Righetti




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