Financial Insights

Sri Lanka announces default of the entirety of it’s debt

Sri Lanka has been in the worst economic crisis of it’s lifetime for quiet some time. However, the country has finally announced that it will be defaulting on all $51 billion of it’s debt.

Sri Lanka has had assistance worth $1.5 billion from India to help the island nation acquire basic necessities like vegetables and medicines. However, the country has inevitably run out of foreign exchange to purchase anything.

In a statement, the Finance Ministry of Sri Lanka has said that its creditors are free to capitalise the interest or accept Sri Lankan rupees. Presently, the Sri Lankan rupee has fallen to 4.3 against 1 Indian rupee.

Sri Lanka has requested debt relief from India and China but both countries have offered credit lines instead. China is the largest creditor of Sri Lanka (over 50% of Sri Lanka’s entire debt).

To make matters worse, credit rating agencies have downgraded Sri Lanka severely over the past year as this has blocked any external loans for the nation. The country was depending on its agricultural output for relief, but its rice output fell over 13% this year as the government had banned inorganic fertilizers for 6 months last year.

The country faces severe crisis as it’s citizens have come to the streets to protest the long blackouts, lack of fuel and shortage of food. A week ago, all 26 cabinet ministers of the Rajapaksa government resigned at once amid the violent protests.

The downfall of the government began when Covid-19 began as their tourism industry, which accounts for over 12% of it’s GDP, faced extreme decline. Economists around the world blame the government’s mismanagement, rash borrowing and wrong economic policies for the crisis.

In an act of desperation the government has asked all its citizens residing abroad to send much needed foreign exchange back home. Anonymous Sri Lankan citizens have replied that they do not trust the government with money. The President has said that he is willing to hold talks with the protesters to ease the situation.

Highlight by Aman Agarwal.

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