On Tuesday, January 18, the island nation will repay $500 million towards an international sovereign bond, the first tranche of a total of $4.5 billion that it needs to pay back this year, to avoid the first default in its history.
Here are the key details about Sri Lanka’s mounting debt problems.
Sri Lanka, through repeated cycles of borrowing since 2007, has piled up $11.8 billion worth of debt through sovereign bonds, which make up the largest part – or 36.4% – of its external debt.
The Asian Development Bank is in second place with a 14.3% share, having lent $4.6 billion. Japan is at 10.9% and China at 10.8%, with each having lent about $3.5 billion each.
The rest of the debt is owned by countries such as India and international agencies including the World Bank and United Nations.
China has lent billions of dollars to Sri Lanka, partly under its Belt and Road Initiative, over the past decade for infrastructure projects including highways, ports, an airport, and a coal power plant.
Critics say the funds have been used for white elephant projects with low returns. China rejects that criticism.
Sri Lanka has asked China to restructure its debt repayments to help navigate the financial crisis.
Government faces multiple challenges
The government is struggling to tame retail inflation, which is running at a decade-high, amid surging commodity prices. It is also struggling to meet a fiscal deficit target of 8.9% of gross domestic product.
Since November, Moody’s, Fitch, and Standard & Poor’s ratings agencies have all downgraded Sri Lanka on debt default worries. Central bank governor Ajith Nivard Cabraal has said the country will meet all its debt repayments in 2022.
Some say restructure, don’t repay
Some experts believe Sri Lanka should restructure its debt and establish a three-year repayment structure.
“Sri Lanka is unreasonably committed to repaying its debt. It is more prudent to press pause on debt repayment and take care of critical economic needs,” Verité Research executive director and economist Nishan de Mel told Reuters.
Rebuilding of forex reserves
Fitch estimates the Sri Lankan central bank will also need to arrange for $2.4 billion to help state-owned and private firms in the country honor the debt obligations they have in 2022, over and above the $4.5-billion central government debt.
The country also needs around $20 billion for essential imports such as fuel, food, and intermediate goods for exports.
Reserves have been at a critical level for months but grew to $3.1 billion at the end of December boosted by a $1.5-billion yuan currency swap from China. – Rappler.com