Explained: what caused the Sri Lankan Economic crisis and who is rescuing it?

Rajapaksa’s government has been unable to pay essential imports like fuel due to a severe shortage of foreign currencies. This has led to power outages lasting as long as 13 hours. The rising inflation and shortages of foreign currency are also affecting ordinary Sri Lankans.

Credit rating agencies downgraded Sri Lanka, effectively locking it out of the international capital markets.

The result was that Sri Lanka’s debt management program, which relied on these markets, became ill-fated and foreign currency reserves plunged by nearly 70% in just two years.

The Rajapaksa government’s decision in 2021 to ban all chemical fertilizers, which was later reversed by the government, also affected the country’s agricultural sector and caused a decline in critical rice crops.

What Happens To Sri Lanka’s Foreign Loans?

The country had $2.31 billion left in its reserves as of February. However, it faces debt repayments of approximately $4 billion in 2022. This includes a $1 billion international sovereign bond (ISB) that will mature in July. The largest portion of Sri Lanka’s foreign borrowing is $12.55 billion. Other major lenders include the Asian Development Bank, Japan, and China.

The IMF released a report last month on the country’s economy that stated that the public debt was at “unsustainable” levels and that foreign currency reserves were not sufficient to pay near-term debt payments.

Citi Research stated in a late-last month note that the conclusion of the IMF and the government’s recent actions were not sufficient to restore debt sustainability. This strongly indicates the need for debt restructuring.

A spokesperson for the IMF said that discussions will begin with Sri Lankan officials about a possible loan program within “coming days”.

Sri Lanka had devalued its currency before heading to the IMF. This further fuelled inflation and added to the suffering of the people, many of whom are facing hardship and long queues.

Rajapaksa also reached out to India and China for assistance, especially on fuel. On Saturday, a diesel shipment that was under the $500 million credit agreement with India in February will arrive. Sri Lanka and India have agreed to a $1 billion credit line to import essentials such as food, medicine, and other items. The Rajapaksa government is seeking at least $1 billion more from New Delhi.

China has offered the CBSL a $1.5billion swap and a syndicated loan of $1.3billion to the government. Now, China may offer the island nation a $1.5billion credit facility and a loan of up to $1billion.