After living through the worst Sri Lanka economic crisis since its independence in 1949, Sri Lanka- the south Asian island nation – is finally stabilizing. At least from the surface. While the situation is still dire, economists and the government are coming up with new plans to rebuild the country’s economy with promises of better times.
Sri Lank – The Tale of a Bankrupt Country
2022 marked the rock bottom of Sri Lanka’s crippling economy, with the country declaring bankruptcy. The nation ran out of food, energy, and field. Inflation peaked at around 90% during the worst phase, and over 300,000 residents left Sri Lanka for livelihood and a better life.
Now, however, things are seemingly getting back on track. Inflation has come down to 59%. The long fuel lines and month-long protests are gone. The government, along with the support of international bodies, is planning long-term solutions to rebuild the economy and take the country out of bankruptcy.
The island nations are grappling with challenges ranging from foreign currency to runaway inflation of 56% and a steep recession. To cope with the demands, the Sri Lankan government has increased taxes and significantly cut down subsidiaries over the already distressed 22 million citizens.
In April, the government negotiated a $2.9 billion bailout from International Monetary Fund. However, the IMF will only approve a $2.9 billion loan to address the Sri Lankan crisis if the country receives debt relief assurances from its bilateral creditors.
According to the World Bank, A significant portion, approximately $52 billion, of Sri Lanka’s debt comes from sources such as international lending organizations and government bonds. Of this, over 40% is owed to bilateral creditors, with China (52%), Japan (19%), and India (12%) being the largest ones.
The Sri Lankan government reports that China, as the leading individual lender, has an outstanding debt of around $7 billion.
The Paris Club, consisting of wealthy western creditors, and India have formally backed the loan restructuring by the multilateral lender, with China – Sri Lanka’s largest lender – as the only holdout.
Debt Restructuring: Where Does China Stands?
Debt restructuring is renegotiating the terms of existing loans and debts to make them more manageable and sustainable. The main goal of debt restructuring is to reduce the country’s overall debt burden and improve its ability to repay its creditors.
Fortunately for Sri Lanka, most creditors agree with its restructuring except China. However, the IMF expressed a willingness to help China understand the issue of debt sustainability. And how its support can help the debt strike the country.
A few days after the Indian foreign affair, minister S. Jaishankar finalized its debt restructuring plan; in his 2-day visit to the island nation, China also expressed its support to help Colombo secure a bailout.
In response to Sri Lank, the Chinese bank responded with a two-year moratorium on debt. This will be a two-year suspension on the payments debts owed to China. The relieving letter arrived on Chinese new year.
However, it’s now yet to be determined if the Chinese assurance contained in the letter would meet the requirement of the IMF and the Paris club. Also, the two-year debt suspension is not yet confirmed by Chinese officials.
Experts still believe that China might not bail out Sir Lanka since, by doing so, the debt-giant regime will open doors for its debtor countries would follow the lead.
Is Debt Cancellation the Solution?
Several prominent economists and academics, including Dani Rodrik, Thomas Piketty, and Jayati Ghosh, have made a public request to cancel Sri Lanka’s debt owed to foreign lenders.
They also want steps to stop illegal money from leaving the country. This statement was put together by the “Debt Justice” campaign group, a global effort to end unfair debt and the poverty and inequality it causes.
Economists and scholars have claimed that the private lenders played a role in Sri Lanka’s first default on its sovereign debt by lending money at a higher cost and making a large profit. Therefore, they believe that these private lenders, who gained from the higher returns, should accept the consequences of their actions and have their debt canceled, which would also mean giving up their loans.
But the opinion is not popular amongst everyone.
WA Wijewardene, a former deputy governor of the Central Bank of Sri Lanka, has expressed concern that if the plan to cancel Sri Lanka’s debt is carried out, it could cause the entire global financial system to fail.
Others believe that debt cancellation can put the current interdependent and interconnected systems at stake, putting other in-debt countries in the queue for the same.
Difficult Times Ahead of Sri Lanka
Despite the efforts, Sri Lank still has a long way to go. For example, two in five households’ food eat up 75% of their total expense, whereas 30% of the population is going through food insecurity.
Recovering economic stability after decades of a crumbling economy will take time to restabilize. The sad reality- dozens of smaller nations are following in the footsteps of Sri Lanks. Worsened by the economic slowdown in the west, the financial blow of the pandemic, and skyrocketing prices due to the Russia-Ukraine war, the world is tracing back to economists’ fear that Sri Lanka would not be the last.
However, how Sri Lanka recovers from its economic catastrophe can teach struggling countries how to weather the bankruptcy storm.
