The main contributors to Sri Lanka's current financial crisis are the country's borrowing pattern and foreign debt obligations.
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| Photo (https://unsplash.com/photos/BojD1DaERcE) |
The current economic crisis in Sri Lanka is a major consequence of the country’s tendency to borrow from debtor nations as well as multilateral institutions, characterized by an uncertain sovereign debt structure. At the end of March 2022, external debt service payments to Sri Lanka were US $ 7 billion, compared to US $ 1.9 billion, while on April 12, the country revealed that it was defaulting on its external debt. US $ 51 billion awaits bailout from International Monetary Fund (IMF). The finance ministry announced that an estimated $ 3 million in external aid would be needed over the next six months to restore the supply of essential commodities and at the same time pave the way for a recovery for the ailing economy.
Background
Sri Lanka’s current sovereign debt crisis has its roots in the early 2000s, when the World Bank promoted the nation from a low-income country to a low-middle-income country. Before Sri Lanka moved to a middle-income country, the bulk of its foreign debt came from concessional funding from multilateral institutions such as the World Bank, the Japan International Cooperation Agency and the Asian Development Bank (ADB). These loans were characterized by favorable loan conditions such as low-interest rates (1% or less) and long duration (25-40 years) for its repayment which helped in systematic management of foreign exchange reserves.
Before Sri Lanka moved to a middle-income country, the bulk of its foreign debt came from concessional funding from multilateral institutions such as the World Bank, the Japan International Cooperation Agency and the Asian Development Bank (ADB).
Although Sri Lanka's foreign debt-to-GDP ratio has declined over the past two decades, changes in the overall structure of external debt have put the economy at risk of a currency crisis over the past few years. As the nation became a middle-income country, the availability of concessional funds became scarce and Sri Lanka’s economy turned to increasing amounts of commercial debt in its external debt structure. These commercial loans were mainly in the form of International Sovereign Bonds (ISBs) - capital market lending instruments, and had low repayment periods (5-10 years) and high interest rates (no more than 6 per cent). In 2007, the country issued the first ISB worth US $ 500 million, followed by major rounds of borrowing from the international capital market in the form of ISBs. From 2004 to 2019.
Figure 1: Sri Lanka's foreign debt past performance (2004 - 2019)
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| Data Source (Central Bank of Sri Lanka and Department of External Resources) |
Although the level of domestic public debt is mostly stable, the foreign debt-to-GDP ratio (including most commercial loans) has increased from 30 per cent in 2014 to 42.6 per cent in 2019. The latter mainly contributes to Sri Lanka’s growing total debt. -To-GDP ratio (domestic and external debt) which reached an all-time high of approximately 101 percent of GDP in 2020 (see Figure 2). Statistical estimates by a World Bank study show that the ideal threshold for the total debt-to-GDP ratio for emerging market economies such as Sri Lanka is 64 percent; And for every additional percentage that exceeds this threshold, it is estimated that the economy will have to spend 0.02 percentage point on real annual growth.
Figure 2: Consolidated Govt. Debt in Sri Lanka (% of GDP) (1990 - 2020)
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| Source (World bank data) |
It is fair to say that Sri Lanka's ever-increasing foreign debt obligations are a major contributor to the current economic crisis. First, it relies on commercial debt regardless of the structural weakness in Sri Lanka. Economies से such as declining trade levels as a percentage of GDP (from 33 per cent in 2000 to 13 per cent in 2019), low levels of FDI (inability of the government to meet the targets set on the FDI front) and tax revenue due to interaction of both domestic and external macroeconomic Complicated, they have been declining over time.
Second, capital inflows from China to Sri Lanka require a more detailed introspection by both countries in the coming years, especially in the context of Sri Lanka's participation in the Chinese Belt and Road Initiative (BRI), before agreeing on further loan terms. The 2017 Hambantota port episode testifies to how Sri Lanka has fallen victim to China’s evil ‘debt-trap diplomacy’. According to official records, China accounts for 9.83% (US $ 3.4 billion) of Sri Lanka's total foreign debt by 2019, while China's liquidation mechanism and hidden debt in various projects also reflect the economic imperialism shown by Beijing, which is problematic for them. The economy of Sri Lanka. The ongoing financial crisis in Sri Lanka has prompted a visit to Colombo by a Chinese foreign minister in February 2022 to ask for a moratorium on repayment of loans - raising the issue of "problematic Chinese debt" once again in world diplomacy. The island nation sought to secure a new loan grant of about US $ 2.5 billion from China in March 2022.
The ongoing financial crisis in Sri Lanka has prompted a visit to Colombo by a Chinese foreign minister in February 2022 to ask for a moratorium on debt repayment - raising the issue of "problematic Chinese debt" once again in world diplomacy.
Sri Lanka’s excessive foreign borrowing in exchange for infrastructure projects that have failed to provide high returns. In addition, rising external debt services have weighed on an already weak economy that has been deprived of the financial benefits of the 26-year civil war that ended in 2009 and then in 2007 as a result of the global financial crisis. -08, along with continuous financial and current account deficits. In April 2022, the Governor of the Central Bank of Sri Lanka announced that there would be no restructuring of domestic debt (such as government bonds and development bonds) at present, but that restructuring external debt would be a priority given the current situation. .
Although a good amount of sovereign capital is expected to drive the economic growth of nations; But for Sri Lanka, universal debt (for example multiple IMF bailouts) was mainly used to save the economy from a series of BOP uncertainties in the past. Faced with the Sri Lankan economy, the impact of the Kovid-19 epidemic on the global economy and, most importantly, the low sovereign credit rating for the Sri Lankan economy will be extremely difficult for Sri Lanka to explore. Business loans from foreign sources in the near future. Going forward, debt diversification and foreign debt restructuring will be crucial for the island nation.
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