Sri Lanka is struggling to pay for imports amid a crushing debt crisis and a sharp drop in foreign exchange reserves that have fueled soaring inflation. Prolonged power cuts and shortages of fuel, food and medicines have sparked nationwide protests.
After weeks of economic turmoil, the island nation of Sri Lanka announced that it would be defaulting on all its external debt - $51 billion - after running out of foreign exchange for imports. Colombo called the move a "last resort." (Economic Times India, 2022)
Default is the failure to repay a debt, including interest or principal, on a loan or security. A default can occur when a borrower is unable to make timely payments, misses payments, or avoids or stops making payments. Individuals, businesses, and even countries can default if they cannot keep up their debt obligations. Default risks are often calculated well in advance by creditors.
That is what is happening in Sri Lanka right now.
The nation is grappling with its worst economic downturn and Sri Lanka's finance ministry said it otherwise had an "unblemished record" of paying its dues since independence from the UK in 1948 (BBC, 2022), with regular blackouts and acute food and fuel shortages.
Sri Lanka’s economic meltdown tracks its roots back to 2019 when President Gotabaya Rajapaksa’s government approved a large tax cut that depleted the treasury coffers even more than expected. The weight of COVID-19 further weighed on revenues while the cost of imports sky-rocketed, and the situation deteriorated to the point of large-scale civil unrest on the streets.
In a statement, Sri Lanka's finance ministry said that creditors, including foreign governments, were free to capitalize any interest payments due to them from April 12 or opt for payback in Sri Lankan rupees.
The immediate debt default was to ensure fair and equitable treatment of all creditors ahead of an International Monetary Fund assisted recovery program for the South Asian nation.
The IMF is s an international financial institution working to foster global monetary cooperation, secure financial stability and reduce poverty around the world. The ministry noted that the IMF assessed Sri Lanka's debt to be unsustainable last month. "Although the government has taken extraordinary steps to remain current on all of its external indebtedness, it is now clear that this is no longer a tenable policy. A comprehensive restructuring of these obligations will be required." the IMF said. (BCC, 2022)
Last year, international rating agencies downgraded Sri Lanka, effectively blocking the country from accessing foreign capital markets to raise much-needed loans to finance imports.
In January, S&P Global Ratings lowered Sri Lanka's rating to a classification where it was "currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments". (BBC, 2022)
Lakshini Fernando of Asia Securities welcomed the move by Sri Lanka's government since it appears to be a better option than hard default. Sri Lanka's foreign reserves stood at $1.93bn at the end of March. However, it has around $4bn in foreign debt payments due this year.
The country recently named a new central bank chief and almost doubled its key interest rate to help tackle soaring prices and shortages of essential goods.
The crisis has caused widespread misery for Sri Lanka's 22 million people and led to weeks of anti-government protests. In recent weeks, demonstrators have taken to the streets of the capital Colombo as homes and businesses were hit with long power cuts.
The International Monetary Fund said on April 23, it held "fruitful technical discussions" with Sri Lanka on its loan request, while the World Bank, international financial organization that provides loans and grants to the governments of low- and middle-income countries to pursue capital projects, said it was preparing an emergency aid package for the crisis-stricken country. (Lawder, 2022)
S&P Global Ratings cut Sri Lanka's rating as an issuer of foreign currency debt to 'selective default' after the South Asian country missed sovereign bond interest payments, S&P said on Monday April 25. The bonds which had missed payments, maturing in 2023 and 2028, were cut to 'default' and the overall rating could be further cut to 'D' on confirmation of the non-payment after a 30-day grace period. S&P said it does not expect the government to make payments during that period.
The World Bank's emergency response package includes $10 million to be made immediately available for the purchase of essential medicines, funds shifted from its ongoing COVID-19 health preparedness project.
The importance of getting to understand this situation is that Sri Lanka could be the first of many and may not be the only country to run aground in the hazardous conditions prevailing in the global economy.
Bibliografia
BBC. (2022, 4 12). BBC. Tratto da https://www.bbc.com/news/business-61076481
BCC. (2022, 4 12). Tratto da https://www.bbc.com/news/business-61076481
Economic Times India. (2022, 04). https://economictimes.indiatimes.com/news/international/world-news/sri-lanka-central-bank-governor-says-to-temporarily-suspend-foreign-debt-payments/articleshow/90794291.cms.
Karunungan, L. (2022, 4). Bloomberg. Tratto da Bloomberg: https://www.bloomberg.com/news/articles/2022-04-11/sri-lanka-default-risk-seen-high-by-citi-as-crisis-delays-loan
Lawder, D. (2022, 4 25). Reuters. Tratto da Reuters: https://www.reuters.com/world/asia-pacific/imf-says-held-fruitful-technical-talks-with-sri-lanka-loan-request-2022-04-23/
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