Explained | How will Sri Lanka overcome its debt crisis?

Explained |  How will Sri Lanka overcome its debt crisis?

Will aid from the International Monetary Fund be enough to restructure loans and save the Sri Lankan economy?

Will aid from the International Monetary Fund be enough to restructure loans and save the Sri Lankan economy?

The story so far: On April 12, Sri Lanka announced its decision to default on its $51 billion foreign debt, tarnishing its track record for prompt repayment of past loans. Citing the International Monetary Fund’s assessment that the country’s outstanding debt was “unsustainable”, the finance ministry said its policy of repaying foreign debt on time was “no longer sustainable”. He described the default move as his “last resort” to prevent “further deterioration” in the country’s financial situation and to ensure fair and equitable treatment of all creditors. In the coming week, Sri Lanka will hold talks with the International Monetary Fund (IMF) in Washington DC, on a comprehensive debt restructuring program.

What is the context of the default value?

Sri Lanka is going through one of its worst economic crises. For months, households and businesses have faced severe food and fuel shortages as the government scrambles to find dollars to pay for essential imports. The emergency financial aid arriving, including from India, is barely enough to sustain the country for a month. With the authorities not sharing a road map or plan, fears of hunger and starvation are growing and thousands of people have expressed their anger against the government. Amid growing protests, the government recently took two major decisions: to default on the country’s debt and to seek IMF assistance to restructure outstanding loans and save its faltering economy.

Does a payment default help?

No middle-income country other than Sri Lanka has resorted to default in recent years. Usually, creditors and investors view a failed country as less business-friendly. This makes it harder for the country to borrow from outside sources. If domestic production is low, as is the case in Sri Lanka, it is even more difficult to cope.

Nonetheless, Sri Lanka’s precautionary default takes the pressure off of having to repay some $7 billion in debt this year, giving the country some time to stabilize. In addition, the default decision came just ahead of planned Colombo talks with the IMF, on the sidelines of the Fund and World Bank’s Spring Meetings, starting in Washington DC on April 18. The IMF should come up with a package that will allow Sri Lanka to restructure its external debt over time. Such a program, including an immediate aid of a few billion dollars, will also make Sri Lanka more solvent on the international monetary market.

How is Sri Lanka doing?

Citizens are struggling to get basic necessities, including cooking gas and kerosene. Fuel is scarce and is now rationed to customers after long periods of waiting in queues. The costs of all commodities have risen sharply, making them unaffordable for most. Colombo is stocking up on fuel and food for the month with outside help, including lines of credit from India.

What are the political implications of this crisis for the Rajapaksas?

Since the moment Sri Lanka’s economic collapse intensified this year, the government of President Gotabaya Rajapaksa has faced considerable pressure from citizens, who have repeatedly called for the resignation of the president. Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa. Although the Cabinet has resigned en masse, none of the brothers in power – whom the public holds primarily responsible for their suffering – seem inclined to resign. Meanwhile, shortages persist and prices are skyrocketing, putting people in dire straits. Even after the government announced its decision to suspend debt service and seek IMF assistance along with a package of structural reforms, it has yet to restore public confidence, according to large demonstrations that continue.

How could an IMF program bail out the country?

The way forward is neither easy nor straightforward for Sri Lanka, even with the help of the IMF. Top Sri Lankan economists have observed that things will likely get worse before they get better and there can be no painless gains. Much would depend on the conditions imposed by the IMF and how Sri Lanka responds to them, given the political will of the government to regain lost ground. It is widely predicted that the reforms recommended by the Fund would include an increase in taxation and a reduction in state spending. What that might mean for the average citizen reeling from this economic calamity remains to be seen. It would be particularly difficult for the Rajapaksa regime, which has lost significant political capital as a result of this crisis, to take and implement difficult political decisions that would be unavoidable at present.

Robert P. Matthews