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Sri Lanka Defaults on Debt, IMF Bailout Likely
Sri Lanka has defaulted on its debt for the first time in its history amid its worst financial crisis in more than 70 years. The country has been hit hard by the pandemic, as well as rising energy prices. A shortage of foreign currency and soaring inflation – which stands at 30-40 percent – have led to a severe shortage of medicines, fuel, and other essentials.
Sri Lanka’s economy is heavily dependent on garment exports, while textiles account for around 50 percent of all exports. Garment exports from Sri Lanka increased by 25.7 percent in 2021 from US$3.939bn in 2020.
Sri Lanka Apparel during its existence in the last 4 decades grew and set itself as the leading manufactured product exporter of Sri Lanka representing 43% of industrial exports and 40% of merchandise.
Sri Lanka defaults on debts for the first time
Economists fear Sri Lanka could be the first of several, with IMF in talks with Egypt, Tunisia, and Pakistan.
Sri Lanka has defaulted on its debts for the first time in its history as it struggles with an economic and political crisis triggered by global shock waves from the pandemic and the war in Ukraine.
An inflation rate spiraling towards 40 percent, shortages of food, fuel, medicines, and rolling power blackouts have led to nationwide protests and a plunging currency, with the government short of the foreign currency reserves it needed to pay for imports.
The Sri Lankan central bank governor said on Thursday that the oldest democracy in Asia had fallen into a “pre-emptive default” on its debts after the expiry of a 30-day grace period for missed interest payments on two of its sovereign bonds. It is the first default by an Asia-Pacific nation this century, according to the credit rating agency Moody’s.
Sri Lanka said last month that it would stop repaying its international debts to conserve dwindling foreign currency reserves, vital for importing key raw materials from overseas.
Speaking after the deadline passed for making $78m (£62.8m) of payments to international creditors, Nandalal Weerasinghe, the central bank governor, said: “Our position is very clear: until there is a debt restructure, we cannot repay.”
Sri Lanka has suspended repayments on about $7bn of international loans due this year, out of a total foreign debt pile worth $51bn. The country’s finance ministry has said it has $25m in usable foreign reserves.
Economists fear Sri Lanka could be the first in a wave of defaults, like other low- and middle-income countries struggle with runaway inflation and supply shocks. The IMF has opened rescue talks with Egypt and Tunisia, both big importers of wheat from Russia and Ukraine, and with Pakistan, which has imposed power cuts because of the high cost of imported energy. Turkey is battling 70% inflation but has so far avoided the need for a bailout.
Sri Lanka is an island nation off southern India: It won independence from British rule in 1948. Three ethnic groups - Sinhalese, Tamil, and Muslim - make up 99% of the country's 22 million population.
One family of brothers has dominated for years: Mahinda Rajapaksa became a hero among the majority Sinhalese in 2009 when his government defeated Tamil separatist rebels after years of bitter and bloody civil war. His brother Gotabaya, who was defense secretary at the time, is now president.
Now an economic crisis has led to fury on the streets: Soaring inflation has meant some foods, medication, and fuel are in short supply, there are rolling blackouts and ordinary people have taken to the streets in anger with many blaming the Rajapaksa family and their government for the situation.
Weerasinghe told a news conference on Thursday that adequate dollars had been released to pay for fuel and cooking gas shipments, helped by $130m from the World Bank and remittances in the foreign currency sent home by Sri Lankans working overseas.
The central bank alongside the government has begun discussions with the International Monetary Fund aimed at working towards a program to address its economic challenges. “Expeditious arrangements are being made to commence the external debt restructuring process,” it said.
Negotiations have also been started to obtain bridging finance to secure foreign currency required to finance imports of essential goods and to strengthen the nation’s social safety net programs, it added.
Sri Lanka’s new prime minister, Ranil Wickremesinghe, said this week that the crisis would get worse in the next couple of months before it could get better.
The worst economic crisis since Sri Lanka’s independence in 1948 has led to the resignation of Mahinda Rajapaksa as prime minister after months of protests that involved violent, fatal clashes on the streets of the capital.
The Covid pandemic had triggered a collapse in tourism, leading to a fall in foreign currency income and rising debt levels – a situation made worse by the surge in global commodity prices this spring, exacerbated by Russia’s war in Ukraine.
President Gotabaya Rajapaksa, who appointed Wickremesinghe to replace his brother as prime minister, has continued to refuse to bow to the demands of the electorate and has held on to power.
Inflation in Sri Lanka is expected to rise close to 40 percent within months, having reached almost 30 percent in April, with food prices up by about half in the past year. The Sri Lankan rupee has fallen by 45 percent against the dollar since the central bank stopped defending the currency in early March, at a time when the US currency has risen sharply in value on foreign exchange markets as the US Federal Reserve raises interest rates in response to rising inflationary pressures.
Sri Lanka’s new prime minister, Ranil Wickremesinghe, said this week that the crisis would get worse in the next couple of months before it could get better.
The worst economic crisis since Sri Lanka’s independence in 1948 has led to the resignation of Mahinda Rajapaksa as prime minister after months of protests that involved violent, fatal clashes on the streets of the capital.
The Covid pandemic had triggered a collapse in tourism, leading to a fall in foreign currency income and rising debt levels – a situation made worse by the surge in global commodity prices this spring, exacerbated by Russia’s war in Ukraine.
President Gotabaya Rajapaksa, who appointed Wickremesinghe to replace his brother as prime minister, has continued to refuse to bow to the demands of the electorate and has held on to power.
Inflation in Sri Lanka is expected to rise close to 40 percent within months, having reached almost 30 percent in April, with food prices up by about half in the past year. The Sri Lankan rupee has fallen by 45 percent against the dollar since the central bank stopped defending the currency in early March, at a time when the US currency has risen sharply in value on foreign exchange markets as the US Federal Reserve raises interest rates in response to rising inflationary pressures.