Bad news on the new year! The people of Sri Lanka are celebrating the new year on Wednesday and Thursday. Today Sinhalese and Thursday Tamil New Year will be celebrated, but only yesterday the bad news came that the economic condition of the country has reached the verge of poverty. The official announcement has been made.
After weeks of tussle, the Sri Lankan government has finally announced that it is not in a position to pay off its foreign debt of around $51 billion or pay interest on it. Meaning it has told the creditors that at present Sri Lanka will not pay the installments of interest. The Sri Lankan Finance Ministry has issued a statement, saying that they do not have foreign exchange left for imports, so this last step has to be taken. The question is, what is the meaning of Sri Lanka’s non-repayment of debt and what can be its consequences? It’s a bit tricky, so it’s better to start with your surroundings.
What happens if you have taken a loan from someone promising to return it within seven days and the amount that comes in the account on the seventh day does not come? If not ourselves, then all of us must have seen this happening with the people around at one time or another. If you have not seen yourself, then remember such scenes from films or TV serials. Sometimes the creditor is a good person, sometimes it comes to taking off the clothes or throwing the goods. Pathans doing recovery in old movies and recovery agents do the same thing nowadays. Whether it is a common customer or big companies, while giving a loan, it is definitely seen whether they are capable of repaying it or not? And how big is the risk of this loan not coming back? This decides how much interest can be charged on it. Higher risk means higher interest. This math works like this all over the world.
But there is a community around the world, which is considered very safe to lend. This is the fraternity, the governments of different countries. They are considered as a guarantee of getting the loan back. The effect of their sovereignty is that the loans given to them are called ‘sovereign loans’ or their guarantees are called ‘sovereign guarantee’. Governments also have the power to print notes and make payments. But there is also a principle in international transactions that the loan should be returned in the currency in which it is taken, that is, Sri Lanka has to pay its debt in dollars, for which it has no arrangement left. This is the reason why the Sri Lankan government has said that the creditors can either take the payment in Sri Lankan rupees or they can increase the loan amount by adding interest amount to the principal.
When the news of ‘default’ of a country comes, it seems as if the country has sat down. Now there will be a lock. The situation would have been serious if it were. But you should know that since 1960 till now 147 governments have failed to pay the installments of their loans or their interest at different times. Generally, when there is a big economic crisis in the world, then such cases increase. During the economic crisis of 2008, countries like Nicaragua and Ecuador had a ‘default’, but it was the effect of the same crisis that in 2015, Greece faced a similar situation. This was considered a major crisis, because it was a ‘default’ of a developed country and its pressure was seen to fall on the entire European Union.
Even today Sri Lanka is not alone. Although there is no relation between the two, but at this time Russia is also facing the same challenge, how to avoid being a ‘defaulter’ in the international debt market? Rating agency ‘S&P’ has said that Russia is a ‘defaulter’ because the interest installments it paid on April 4 were paid in rubles instead of dollars. Russia’s trouble is that Ukraine has been cut off from international payments networks by the US and the West since its attack. The danger has also come before him that he is not in a position to pay the installments of his creditors. It can be said that Russia itself has bought this trouble. But the situation in Sri Lanka is different. Just a few years ago, examples were given in India that how fast Sri Lanka and Bangladesh are progressing. Especially in the case of textile exports. Sri Lanka’s tourism business was also flourishing, but Corona ruined it all and after that other weaknesses of government and business also started coming to the fore.
The situation deteriorated so fast that no one could have imagined. Sri Lanka suddenly declared a ‘food emergency’ in August last year. It was a declaration of a kind of economic emergency. The prices of food items were skyrocketing and there were long lines for petrol and diesel. When foreign investors pulled out money from the market, the situation became more serious. Sri Lanka imports almost everything it needs, which is very difficult for it.
Meanwhile, Bangladesh, India, South Korea and China have tried to help him. But now where he has reached, even a little help is not going to work. Experts say, it is most important that the political leadership of Sri Lanka should change and such people should come to power, in whom the people there trust as well as the international fraternity. Then maybe they can decide to take some tough measures, and without that they can also get help from other countries. This is necessary for a better future not only for Sri Lanka but for the entire region.
(These are the author’s own views)