Though wrenching, the decision to suspend debt payments may be the first serious step towards fixing the country’s deepening economic crisis
SRI LANKA has suffered multiple crises and nearly three decades of civil war since it won independence from Britain in 1948. But it had never failed to pay back its debts. That changed on April 12th, when the South Asian island nation’s finance ministry said in a statement that it would suspend payments on all foreign debt until it had come to an agreement with creditors on how to restructure the loans. The document stressed the country’s unblemished record of meeting its obligations.
The de facto default is the culmination of a crisis that has been brewing for years in the country of 22m people. A slew of ill-conceived tax cuts in 2019, combined with a pandemic-induced collapse in tourism, prompted ratings agencies to downgrade Sri Lanka’s bonds in early 2020, in effect locking it out of international credit markets. The agencies have since taken an even dimmer view.
Mr Rajapaksa’s growing unpopularity and the failure of his attempt to intimidate the public have further eroded his authority to deal with the crisis. But at least his recent appointments have given Sri Lanka a new central-bank governor and a finance minister who appear clear-eyed about just how much trouble the country finds itself in. The suspension of payments follows a move by the central bank on April 8th to raise the interest rate by a staggering seven percentage points, to 14.
Such agreement may not be forthcoming. China, which has lent large amounts of money to a host of other highly indebted emerging markets, may be particularly reluctant to set a precedent by starting to accept haircuts. It has yet to respond officially to a request for restructuring which Sri Lanka made back in January.
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