The real cause of Sri Lanka’s grim debt crisis

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Queues build up at a petrol station in the Sri Lankan capital Colombo on July 17, 2022. [Photo/Agencies]

Sri Lanka’s debt crisis, which led to political upheaval and a change of government, was the result of debt accumulation, domestic political dysfunction and external shocks.

Sri Lanka has long relied on external borrowing to pull itself out of financial crises. It has concluded 15 loan agreements with the International Monetary Fund in 52 years, the ratio of its external debt to gross national income having been above 50% for years.

Sri Lanka is a country not only highly indebted, but also with a very fragile debt structure. Short-term debt and private creditors, which are highly vulnerable to capital flight and interest rate volatility, account for 45% of its total external debt, while official creditors, which have low financing, long maturities and more stable financial flows account for only 36 percent.

In addition, the COVID-19 pandemic and the Russian-Ukrainian conflict have had a huge impact on Sri Lanka’s revenues, as they have reduced or even dried up the flow of tourists to the country while affecting its tea exports, especially to Russia. The fact that the tourism industry accounted for around 13% of Sri Lanka’s GDP and that tea was a very big earner of foreign exchange before the pandemic shows the importance of these industries. In 2020, for example, the number of tourists visiting Sri Lanka was only about 20% of that in 2018.

Poor macroeconomic policies also accelerated Sri Lanka’s economic collapse. After coming to power in 2019, former President Gotabaya Rajapaksa implemented three major policies: tax cuts, printing more banknotes and introducing green agriculture.

As tax cuts widened the budget deficit, with the ratio of tax revenue to GDP falling from 12.6% to 9.1% in 2019-20, the government overissued banknotes to fill the financing gap , triggering hyperinflation. As for the green agriculture policy that came into force in 2021, it not only drastically increased agricultural costs, but also halved production, creating an unprecedented food crisis.

As such, Sri Lanka is mired in a debt crisis, an economic crisis and a food crisis. To overcome the economic crisis, Sri Lanka must first adopt prudent monetary and fiscal policies and tackle the problem of food shortage at the national level, and to solve the debt crisis, it must cooperate with the international community.

In 2021, the share of sovereign bondholders in Sri Lanka’s external debt reached 47%, with China accounting for 10%, the Asian Development Bank 13%, Japan 10%, the World Bank 9% and India 2%. Therefore, contrary to what some Western politicians claim, China is not Sri Lanka’s largest creditor and Sri Lanka’s debt crisis cannot be solved by China’s debt waiver alone.

Over the years, China has contributed to the economic construction of Sri Lanka and helped improve the livelihoods of its people. The infrastructure projects that China has promoted and built overseas have not only reduced construction costs, but are also adapted to the respective geographical and climatic conditions of the host country, and thus meet the realistic needs of developing countries.

Moreover, China’s overseas infrastructure projects come with long-term capital. As a result, China’s stable and preferential funds for Sri Lanka’s infrastructure projects were based on a policy of long-term infrastructure investment, high investment and a long payback period, which helped the country to overcome many financial problems and to continue on the path of development.

Although China’s financing of Sri Lanka’s infrastructure projects has increased Sri Lanka’s liabilities, it has also increased its public assets, while improving interconnectivity within the country and with the outside world, reducing thereby lowering transport costs and making the logistics sector more efficient.

China has always pursued an independent foreign policy and follows the five principles of peaceful coexistence, including non-interference in other countries’ internal affairs.

In addition, China helped finalize the G20 debt moratorium initiative for least developed countries in 2020 and the common monitoring framework after G20 member states launched a debt service suspension initiative. debt at the start of 2020 to provide debt referrals to 73 of the world’s poorest countries. . In fact, China has suspended the most debt repayments of any G20 member.

The year 2022 marks the 65th anniversary of the establishment of diplomatic relations between Sri Lanka and China. The two sides have always maintained close and friendly relations and promoted the spirit of “independence and self-reliance, solidarity and mutual assistance”.

Since the Sri Lankan crisis erupted, China has sent emergency humanitarian aid worth 500 million yuan ($72.10 million) to Sri Lanka, including medicine, fuel, rice and other basic necessities to help the country cope with the crisis. And China sincerely hopes that Sri Lanka, under the new government, will emerge from the crisis, revive its economy and restore peace, stability and prosperity to the country.

The author is deputy chief of staff of the National Institute for Global Strategy.

Opinions do not necessarily reflect those of China Daily.

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