What if Sri Lanka goes bankrupt amid the external debt crisis?

Amid the COVID-19 pandemic and humanitarian and financial crisis, Sri Lanka could experience total bankruptcy this month, especially as inflation has reached record highs. As the country announced a national financial emergency following a sharp drop in the value of the Sri Lankan rupee on August 30, 2021, the country continues to face a double deficit.

Writing in Colombo Gazette, Suhail Guptil said Sri Lanka has faced a budget and trade deficit for most of the past decade. The report notes that since 2014, Sri Lanka’s external debt level has climbed to 42.6% of DGP in 2019. It was also explained that the nation’s cumulative external debt was estimated at $ 33 billion in 2019. , which weighed heavily on the nation for debt service.

What happens if Sri Lanka goes bankrupt?

As estimated, if Sri Lanka’s foreign exchange reserves are completely depleted by January 2022, the country would be required to additionally borrow at least $ 437 million to make essential payments. At present, the main challenge facing the government headed by President Gotabaya Rajapaksa is to manage the US $ 4.8 billion external debt service owed during the period from February to October 2022. Meanwhile, inflation also hit an all-time high of 11.1% in November 2021 and soaring prices, even the wealthy are struggling to feed themselves and their families. Basic commodities, according to The Guardian, are unaffordable for many.

In an attempt to mitigate the impact of the disappearance of the reserves, the Sri Lankan government has reportedly resorted to temporary aid measures, including lines of credit to import food, medicine and fuel from its ally. neighbor, India. He also chose to exchange currencies from India, China and Bangladesh and loans to buy oil from Oman, Guptil wrote in his article. Sri Lanka is also planning to repay its oil debts with Iran by paying them off with tea and sending tea worth $ 5 million to the Islamic Republic.

To cut spending, the government closed three diplomatic missions abroad as of December 2021. But even these methods are expected to pose problems for the nation in the long run, thus exacerbating the debt burden. Sri Lanka would eventually have to repay any amount it borrows from the nations.

As part of other measures taken by the Rajapaksa-led government to deal with the economic crisis in the country, Sri Lanka has asked China to restructure its loans and access preferential credits for imports and essential goods. . AP said Sri Lanka is currently facing the worst economic crisis in part because of the Beijing-funded projects that do not generate income. The indebted President of Sri Lanka met Chinese Foreign Minister Wang Yi on Sunday.

Rajapaksa told Wang that it would be “a great relief for the country if attention could be paid to restructuring debt repayments as a solution to the economic crisis that has arisen in the face of the COVID-19 pandemic.” It should be noted that Sri Lanka’s foreign exchange reserves have fallen to around $ 1.6 billion and its external debt obligations exceed $ 7 billion in 2022, including bond payments worth $ 500. million dollars and $ 1 billion in January and July respectively.

Chinese plans in Sri Lanka are partly to blame

The depletion of foreign reserves is partly due to infrastructure projects in Sri Lanka built by Chinese loans but not making money for the government. According to AP, figures from the Central Bank show that current Chinese loans to Sri Lanka stand at around $ 3.38 billion, excluding loans to state-owned companies. Muttukrishna Sarvananthan, Principal Investigator at Point Pedro Development Institute, said: “Technically we can pretend we are bankrupt now … When your net foreign assets are in the red, it means you are technically bankrupt” , according to AP.

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