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Sri Lanka defaults on debt | VTV.VN

Sri Lanka on April 12 declared insolvency because it failed to pay its foreign debt of up to 51 billion USD. Photo: EconomicTimes

Sri Lanka’s government on April 12 declared default because it failed to pay its foreign debt of up to 51 billion USD and was waiting for a bailout from the International Monetary Fund (IMF).

“The government has only taken this emergency measure as a last resort to prevent further deterioration of the country’s financial situation,” a statement from the Sri Lankan Finance Ministry said.

The island nation of 22 million people Sri Lanka has declared itself insolvent on $51 billion in foreign debt, as it faces its worst economic crisis since independence in 1948.

Of this $51 billion debt, Sri Lanka has to pay $4 billion of its external debt in 2022, including $1 billion in international government bonds due in July. Asian Development Bank (ADB), Japan and China are among the top creditors of this South Asian country.

Broken chain

President Murtaza Jafferjee of the Advocata Institute for Policy Consultancy (based in Sri Lanka) candidly acknowledged the situation in Sri Lanka: “30% due to bad luck. 70% due to poor management… A series of mistakes followed. mistake”.

Recently, Sri Lanka has had to go through a serious financial crisis on many fronts, partly caused by Impact of COVID-19 on the tourism industry. Sri Lanka’s tourism industry, contribute 10% economy, has struggled since the 2019 Easter bombings that killed 269 people, including 45 foreigners, followed by travel restrictions related to the COVID-19 pandemic.

In addition, the impact from the weak economy, high government spending and cutting reduce tax from 15% to 8%, abolish 7 taxes causing the state’s revenue to be in deficit… also leading to the current breakdown of the chain.

Foreign exchange reserves down 70% in the past 2 years and only about 1.93 billion USDas of the end of March 2022, making it difficult for Sri Lanka to import essential goods, including food and fuel.

In an effort to reduce pressure on foreign exchange reserves, in 2021, Sri Lanka banned the import of chemical fertilizers and agrochemicals, aiming to become the first country in the world to produce organically. This country is confident that it willsave about 200 million USD. But the fact is that this policy has caused a serious decrease in the output of key commodities such as tea leaves, cinnamon, pepper…, increasing the deficit of rice – which is the main food.

Sri Lanka's debt default: From a rising star to a chain breakdown - Photo 1.

The crisis has caused hardship for the 22 million people of Sri Lanka. (Photo: AP)

The shortage of foreign currency has made it difficult for the country to import essential items such as food, gasoline or medicine. Many people had to wait in long queues to buy food and cooking oil, while the Sri Lankan government had to implement a nationwide power cut 13 hours a day or issue stamps with powdered milk, sugar, and lentils. and rice. This has caused discontent among the people, who have taken to the streets to protest for weeks.

Zahara Zain, the owner of a small food business, says what’s going on reminds her of poor Sri Lanka more than 50 years ago. “It feels like we’re reliving the 1970s, when everything was rationed“.

Sri Lanka’s President Gotabaya Rajapaksa imposed a curfew and declared a state of emergency in early April in response to widespread unrest and the risk of continued protests, including the hurling of bricks and the burning of buses in front of his house. the president’s residence in Colombo.

In addition, government printing of money to pay domestic loans and foreign bonds also promotes inflation. Last month, inflation here hit 18.3% – double the rate in the US.

International rating agencies repeatedly downgraded Sri Lanka’s credit rating, making it difficult for the country to access foreign capital markets to raise the loans needed to finance imports.

Borrow a lot

Analysts say that the crisis in Sri Lanka has formed for many years, mainly due to borrowed heavily from foreign creditors to provide domestic public servicesas infrastructure.

Official figures cited by the Guardian show, China accounts for about 10% of Sri Lanka’s $35 billion in foreign debt, as of April 2021. This figure could be much higher if debt owed by state-owned companies and central banks is included.

A series of projects in Sri Lanka have sprung up from China’s debt, including Hambantota port – also known as a shipless port; Mattala Rajapaksa international airport – known as the world’s most empty airport and a monumental cricket field near but empty.

Sri Lanka has found a way debt relief from India and Chinabut both of these countries only give more credit lines for the country to buy goods from them.

Sri Lankan Finance Minister Basil Rajapaksa, his counterpart Nirmala Sitharaman and Foreign Minister S. Jaishankar of India witnessed the signing ceremony of the agreement on 17 March in New Delhi, related to 1 billion USD short-term preferential loan to the Sri Lankan Government through the National Bank of India (SBI).

According to Bloomberg, Sri Lanka is asking for Borrowing 1 billion USD from China to repay loans due in July this year as well as to1.5 billion USD credit line proposal to buy goods from the world’s No. 2 economy, including textiles and garments for export.

Debt settlement?

Unlike a bankrupt business, it is more difficult for creditors to recover the assets of a country than the assets of a corporation. Creditors can sue in court, but even if they win, it’s nearly impossible to force a country to pay off a debt.

For example, Argentina has lost more than 100 times, but still refused to pay dues when it defaulted on its debt in 2001.

However, it is customary to avoid losing credibility in the international market, instead of refusing to pay, defaulting countries will choose to restructure their debt by reducing interest, principal or extending the repayment period. time to turn around.

On April 12, Sri Lanka’s Ministry of Finance said that creditors, including foreign governments that have made loans, are free to capitalize on interest expenses (interest added to the loan balance) as they mature. from the afternoon of April 12, or choose to pay back in Sri Lankan rupees.

Sri Lanka's debt default: From a rising star to a chain breakdown - Photo 2.

The Sri Lankan rupee is currently the world’s worst performing currency. Photo: CGTN

The Central Bank of Sri Lanka is calling on people abroad to increase remittances through official channels to support the country. Last month, the Sri Lankan government floated the rupee’s local currency, meaning the rupee’s price will be determined based on supply and demand for foreign exchange.

Amid the escalating crisis, all 26 ministers in the Sri Lankan government resigned over the weekend. The International Monetary Fund (IMF) is expected to have discussions with Sri Lanka on a loan program next week to help the South Asian country overcome the crisis. Speaking during a debate in Parliament, Sri Lanka’s Parliament Speaker Mahinda Yapa Abeywardana warned: This is just the beginning!

Sri Lanka has to look to poorer countries like Bangladesh to apply for a line of credit to buy fuel and powdered milk. Oil from Iran is paid with tea leaves.

And before economists or diplomats get to the negotiating table, doctors in Sri Lanka are broadcasting the warning, that The health crisis can now kill more people in the country than COVID-19, in the context that this country is about to run out of medicine and medical equipment.

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