Sri Lanka won its independence from the British in 1948. It has never failed to go into sovereign debt, even after three decades of a brutal war which took thousands of lives. This appreciative track record looks like it has taken the opposite route.
Sri Lanka’s appeal to the IMF (International Monetary Fund) of $4bn (£3bn) for emergency financial support to make payments of its outstanding debts and invest in importing essential goods is much oncoming now, partially acknowledging gratitude towards India, a neighbouring country for representation.
The country’s total debts are approximately $35bn (£26.9bn), from which $12.6bn (£9.7bn) is in the form of government bonds, sold to foreign investors where Japan and China own around one-fifth of it. The country admitted that it had become ‘impossible’ to pay its debts.
The country’s economy is disintegrating continuously. Shortages of food, fuel, medicine and other essentials have increased, power cuts have been frequent, and foods such as rice and sugar have been rationed. Moreover, street protests have been unavoidable.
Inflation now stands at 20%, and The central bank, which amid the crisis, just changed its governor, increased its deposit rate drastically from 6.5% to 13.5% and its lending rate to 14.5% from 7.5%.
How did Sri Lanka reach such an impregnable status?
Sri Lanka is a country that is an abundant producer of agricultural goods like tea, rice and rubber and is rich in mineral resources such as limestone and phosphate. Nevertheless, the country is facing such large issues mainly due to long-term and short-term factors.
Over the number of years and due to sequential governments, the country went through economic mismanagement, particularly at the end of the civil war in 2009, the decision to focus on domestic markets rather than export markets. It is a country that focuses on imports, all the more reason to have a strong export to raise foreign currency reserves.
The money lent by the Chinese may have played an important role in the economic value of the country. An example of such a situation is a deep water port that opened on the southeast coast in Hambantota in November 2010. Even though the port comes under the country’s second-largest port but now is owned by Chinese companies.
Governments’ finances were damaged when some unaffordable tax cuts were made in 2019. Lately, Sri Lanka had banned the use of chemical fertilisers to cut the country’s dependence on imports. Previously, the country imported up to $400m (£308m) worth of chemical fertilisers.
Besides these problems faced by Sri Lanka, the pandemic took a worse toll on the tourism sector, affecting another key foreign currency sector.
The bigger picture is looking at how many countries will follow the fate of this country. Sri Lanka cannot be the only Asian or African country that has been so highly indebted to China. On the other hand, Pakistan’s government has fallen. The after effects of the pandemic and the destruction because of the war on Ukraine have devastatingly hurt the economies of various countries. Sri Lanka will not be the last to go through this situation alone, even though some destruction was self-harmed.