What happens if Sri Lanka goes bankrupt amid foreign debt crisis?

Amid the COVID-19 pandemic, and humanitarian and financial crisis, Sri Lanka could witness total bankruptcy this month, especially as inflation has risen to record levels. While the country had announced a national financial emergency following an acute fall in the value of the Sri Lanka Rupee on August 30, 2021, the nation continues to face twin deficits. 

Writing in Colombo Gazette, Suhail Guptil said that Sri Lanka has been facing a fiscal deficit and trade deficit for most of the last decade. The report noted that since 2014, the foreign debt level of Sri Lanka has soared to 42.6% of DGP in 2019. It has also been explained that the cumulative foreign debt of the nation was estimated at $33 billion in 2019 mounting a massive burden on the nation for debt servicing. 

What happens if Sri Lanka goes bankrupt?

As estimated, if Sri Lanka’s currency reserves completely deplete by January 2022, the nation would be forced to additionally borrow at least US$ 437 million to make essential payments. Presently, the main challenge in front of the government led by president Gotabaya Rajapaksa is ways to manage foreign debt service of US$ 4.8 billion due during the period from February to October 2022. Meanwhile, inflation has also hit a record high of 11.1% in November 2021 and soaring prices have left even the well-off people struggling to feed themselves and their families. Basic goods, stated by The Guardian, are unaffordable for many.

In a bid to cushion the impact of vanishing reserves, the Sri Lankan government has reportedly resorted to temporary relief measures including credit lines to import food, medicines and fuel from its neighbouring ally India. It has also chosen to swap currency from India, China and Bangladesh and loans to purchase petroleum from Oman, wrote Guptil in his article. Sri Lanka is also planning to pay off oil debts with Iran by paying them with tea and sending the Islamic Republic $5 million-worth tea.

To cut down on expenditure, the government has closed three overseas diplomatic missions from December 2021. But even these methods are set to mount problems for the nation, in the long run, adding to the debt load. Sri Lanka would have to eventually pay back any amount that it borrows from the nations.

In other steps taken by the Rajapaksa-led government to handle the economic crisis in the country, Sri Lanka asked China for restructuring of its loans and access to preferential credit for imports and essential goods. AP stated that Sri Lanka is presently facing the worst economic crisis partly due to Beijing-financed projects that fail to generate revenue. The President of debt-stricken Sri Lanka met with Chinese Foreign Minister Wang Yi on Sunday.

Rajapaksa told Wang that it would be “a great relief to the country if attention could be paid on restructuring the debt repayments as a solution to the economic crisis that has arisen in the face of the COVID-19 pandemic.” It is to note that Sri Lanka’s foreign reserves are down to around $1.6 billion, and its foreign debt obligations exceed $7 billion in 2022 including payments of bonds which are worth $500 million and $1 billion in January and July respectively. 

Chinese projects in Sri Lanka are partly to blame

The depletion of foreign reserves are partly due to infrastructure projects in Sri Lanka built by Chinese loans but don’t make any money for the government. According to AP, Central Bank figures show that current Chinese loans to Sri Lanka are around $3.38 billion excluding loans to state-owned businesses. Muttukrishna Sarvananthan, principal researcher at the Point Pedro Institute of Development said, “Technically we can claim we are bankrupt now…When you have your net external foreign assets have been in the red, that means you are technically bankrupt," according to AP.

Image: AP, Pixabay