Sri Lanka is officially bankrupt. It became apparent a few months ago when the government was found unable to repay its $ 51 billion external debt. Today, Prime Minister Ranil Wickremesinghe also confirmed it to Congress. Bankruptcy country, what does that mean? And what is the impact on the inhabitants?
Sri Lanka is bankrupt and is not ready to get out of the crisis. Prime Minister Ranil Wickremesinghe spoke to Congress today. He also predicts a serious recession next year with a serious deficit.
Bankruptcy country, what does that mean?
Earlier this year, in April, Sri Lanka was unable to repay its loan for the first time since its independence in 1948. The former British colony cannot repay debts in excess of € 50 billion.
“The moment the country can no longer pay its debt and can’t borrow money in the international capital markets, it goes bankrupt,” says ABN AMRO economist Eric Jolly. “For lenders in that country, that means they will never see their money again.”
How did you get here?
Sri Lanka relies heavily on international tourism. But it’s pretty much collapsed. After several attacks on the church in 2019, a serious setback occurred. After that, the corona pandemic hit tourists last. The pandemic has reduced tourism revenue by 90%. Therefore, foreign currency is as good as it is exhausted. As a result, they were unable to import sufficient food, fuel and other necessities.
But the government’s explanation for the collapse of tourism is only part of the reason for the serious crisis that Sri Lanka has fallen into, says Eric Jolly.
“Most economists have come up with other explanations. First, Sri Lanka, with the help of China, was tempted by some infrastructure work that might not actually have been needed.” Previously, Sri Lanka had to relocate its port to one of its major creditors, China.
Second, when the issue of currency depreciation surfaced in 2021, the government urged farmers to use local fertilizers so that foreign currency remained in the country, but the quality of those fertilizers was inadequate. It turned out that the economy shrank as the harvest failed and tea and rubber fell. “
What does this mean for the people of Sri Lanka?
Governments that can no longer borrow money can no longer invest money. As a result, civil servants are no longer paid and the unemployment rate is rising.
“Money has fallen sharply because of the surge in inflation,” says Eric Jolly. “Consumer prices have risen 55% between June last year and now. Transport has risen more than 128% in a month.”
How do all of this appear specifically? A line of shops for rare items, fuel rations, endangered hospital operations, and partially closed public transport. In recent months, 22 million people in Sri Lanka have suffered daily power outages, fuel and food rations.
Fatigue has led to intense street protests in recent months, killing several people and requiring politicians to resign.
If a country goes bankrupt, the International Monetary Fund (IMF) usually intervenes. Negotiations with the IMF are certainly underway, but the outcome depends on plans with creditors to restructure Sri Lanka’s debt by August.
The IMF is calling on Sri Lanka to curb corruption and raise taxes significantly. The central bank of Sri Lanka recommends raising interest rates to curb ultra-high inflation.
“If a country meets these requirements, there is usually some form of international solidarity,” says Eric Jolly. “The World Bank has already approved a $ 600 million loan and India will see if it can restructure its debt,” he said.