In the midst of its worst economic crisis in over 70 decades, Sri Lanka on Tuesday announced announced that it will default on its external debt pending a bailout package from the International Monetary Fund. Sri Lanka’s central bank said on Tuesday it had become “challenging and impossible” to repay external debt, as it tries to use its dwindling foreign exchange reserves to import essentials.
Officials say the move will free up foreign currency to finance desperately needed food, fuel and medicine imports after months of scarce supplies.
The government is seeking around $3 billion in IMF support over the next three years to revive the economy, finance minister Ali Sabry told parliament on Friday.
How much debt does Sri Lanka have now?
Just under half of Sri Lanka’s debt is market borrowings through international sovereign bonds, including one worth $1 billion that was maturing on July 25. A coupon payment of $78 million is due across two of its bonds maturing in 2023 and 2028 on Monday, though there is a 30-day grace period.
Estimates showed Sri Lanka needed $7 billion to service its debt load this year, against just $1.9 billion in reserves at the end of March.
How did the island nation get here?
The Sri Lankan government has borrowed heavily from Beijing since 2005 for infrastructure projects, many of which became white elephants.
By January 2015, a big chunk of Sri Lanka’s external debt was owed just to China. To repay the money, Sri Lanka decided in 2017 to privatise a majority stake of the port to a Chinese company called the China Merchants Port Holdings Company.
Another ‘white elephant’ seems to be the Mattala Rajapaksa International Airport, which is referred to by Nicholas Assef, founder of LCC Asia Pacific, as the “world’s emptiest international airport” that failed to boost trade and tourism.
Another blow to the country’s dwindling finances came after President Gotabaya Rajapaksa a 10-year transition to fully organic farming in Sri Lanka. What was supposed to be a slow and gradual transition turned into a sudden shock when in April 2021, he announced that starting next month, the import of chemical fertilisers and agrochemicals would be completely banned in the country.
The snowballing economic crisis began to be felt after the coronavirus pandemic torpedoed vital revenue from tourism and remittances. The government imposed a wide import ban to conserve dwindling foreign currency reserves and use them to service the debts it has now defaulted on.
Friends in Need
India has extended assistance of about USD 2.5 billion in the past three months to Sri Lanka and it includes credit facilities for fuel and food. “Since mid-March, over 270,000 metric tonnes of diesel and petrol have been delivered to Sri Lanka.
In addition, around 40,000 tonnes of rice have been supplied under the recently extended USD 1 billion credit facility,” Ministry of External Affairs Spokesperson Arindam Bagchi said at a media briefing.
“We have already conveyed to them on various occasions our readiness to extend whatever support we can and as has been demonstrated by our actions till now,” he said.
A shipment of 11,000 MT of rice from India arrived in Sri Lanka on April 12 to help the economic crisis hit Sri Lankans celebrate the traditional national new year.
Besides, the Reserve Bank of India (RBI) has extended a currency swap of $400 million and deferred payments owed by the Central Bank of Sri Lanka under the Asian Clearance Union worth several hundred million dollars.
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