(P30)(asiapacific)Sri Lanka Facing Growing Debt Crisis amid COVID-19 Trade Shock

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July 18, 2021

Colombo takes on more Chinese loans . . .

Sri Lanka’s President Gotabaya Rajapaksa has turned to Beijing twice in as many months as his country looks for help in bailing out its accumulating foreign debt. In response, Beijing has granted a C$820 million dollar loan to help Sri Lanka fight the virus and improve its infrastructure. The country appears to be doing rather well controlling its domestic COVID-19 infections – there are 925 recorded cases among a population of nearly 22 million. However, the economic shock of the pandemic is impacting Sri Lanka’s export- and tourism-oriented economy, adding additional pressure on its already heavy debt burden.

A country deep in debt . . .

Worries abound that Sri Lanka could be pressured to hand over strategic assets, including the Beijing-financed Hambantota Port, which is currently leased to China for 99 years and had a C$1.6 billion construction cost. However, the debt to China is only the tip of the iceberg, and the full picture of Sri Lanka’s debt crisis poses a structural weakness for its entire economy. Sri Lanka’s debt to China only makes up 10 per cent of its foreign debt – mostly loans with a grace period of five years and a payment period of 15. The largest portion of Sri Lanka’s foreign debt, at 39 per cent, is in international sovereign bonds, which typically have higher interest rates and shorter payment schedules, usually within seven years.

Seeking solutions . . .

Under Sri Lanka’s debt crisis lies a larger balance-of-payments crisis – the country’s trade income has been hampered due to protectionism and the pandemic, while the payment of its foreign debt is soaring. Due to the maturity of the international sovereign bonds, leading to larger payments owed, the Sri Lankan government has to seek additional ways to generate revenue or expand foreign reserves. Seeking a solution, the government even appealed to the 1.2 million public sector workers to donate their May salaries in full or in part to help the government overcome the debt crisis.