Story of Sovereign Default – Sri Lanka


How did Sri Lanka’s economic crisis get so bad – and how can the country move forward from here?

Sri Lanka has had a very interesting year. On April 12, the nation missed a payment on its foreign debt (apart from debt owed to multilateral organizations like the World Bank), and in July, an executive president resigned, both firsts in Sri Lankan history.
The current economic crisis in Sri Lanka is the worst to ever affect the country since gaining independence. Fuel, cooking gas, medicine, and many other necessities are in low supply. The nation is also experiencing a political crisis, which led in island-wide demonstrations and Mahinda Rajapaksa’s departure from the position of prime minister in May. President Gotabaya Rajapaksa, Mahinda’s brother, was also forced to quit two months later.

Temporary Causes

For many years, Sri Lanka has had an economy that is extremely susceptible to both local and international shocks. Since gaining independence, the nation has experienced repeated balance of payment issues and has 16 times sought IMF assistance to get through these challenges. But this time, things are far more complicated and significantly different because Sri Lanka was forced to halt debt repayments to international creditors for the first time in its history.

While a sovereign default was a possibility due to long-standing vulnerabilities, the current state—which is almost unlivable—is specifically a result of poor economic management over the previous 2.5 years. In November 2019, tax cuts implemented by the newly elected administration led by Gotabaya Rajapaksa started a string of bad economic decisions. Due to the tax reductions, Sri Lanka’s credit rating was lowered in December 2019, making it more challenging for Sri Lanka to borrow money from global capital markets. Early in 2020, COVID-19 exacerbated the situation as the global pandemic impacted Sri Lanka’s tourism sector, which contributed about 25% of the nation’s foreign exchange profits.
Due to COVID-19’s negative effects, Sri Lanka’s credit ratings were further downgraded in March/April 2020, making it nearly impossible to borrow money from foreign capital markets. This meant that Sri Lanka could no longer repay the enormous amount of capital market borrowings obtained over the previous ten years using its preferred method of borrowing from international capital markets by issuing International Sovereign Bonds (ISBs). From 2019 through 2030, Sri Lanka will have an ISB that will need enormous repayment of foreign loans. About half of Sri Lanka’s foreign loan repayments from 2020 to 2025 will go toward ISBs.

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By: Miss Cherry May Timbol – Independent Reporter

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