Sri Lanka’s political turmoil, followed by deepening bond losses, hamper the government’s ability to repay its debts.
The Guardian reported that all 26 cabinet ministers, except the president and his brother, the prime minister, resigned en masse on April 3 amid anti-government demonstrations.
According to the Times, the president then invited opposition parties to join his cabinet, but no one took the offer. He promised to reform, seeking solutions to the worst economic crisis in decades and public rage over his family’s dominance.
The New York Times reported that Sri Lankans responded unequivocally, rejecting the president’s offer. They pledged to protest until he quit his presidency.
The political turmoil comes as the island nation struggles with a crash crunch, causing the government to impose capital controls and import curbs.
According to Fitch Ratings, Sri Lanka’s scheduled foreign-currency debt servicing in 2022 is 430% more than the end-November 2021 foreign-exchange reserves. Cumulative foreign-currency debt-servicing payments within the 2022- 2026 period reach 26 billion dollars. Cumulative external obligations in the first quarter this year are about 3 million, nearly 188% of reserves.
Bloomberg showed that Sri Lanka’s 1 billion dollar bond due in July slumped 7 cents to 59 cents on April 4. This drop marked its lowest price since May 2020.
The country’s stock market halted trading after a steep fall in the benchmark share price index on April 4. The Sri Lankan rupee depreciated further, having fallen 33% against the dollar since the beginning of the year. The government is out of money to import much-needed commodities.
The island nation’s crisis comes from a bad debt habit of the government.
Debt accounts for 109% of GDP in 2021 and is predicted to constitute 116.1% of GDP by 2025.
China is its largest bilateral creditor, making up about 10% of Sri Lanka’s foreign debt.
The crisis-stricken country has borrowed massively from China, partly under China’s Belt and Road Initiative.
The Associated Press indicated that one of the reasons Sri Lanka’s foreign exchange bottomed out was that Chinese-funded projects were not profitable.