The debt crisis for developing countries is not a new phenomenon. For decades, debt repayment has necessitated the transfer of money from developing nations in the global South to developed ones in the North. The amount owed by developing countries to foreign creditors in 1989 was $1.3 trillion, which was well over half of their combined GDP and two-thirds of their export revenue. According to Debt Justice, a total of 54 countries are experiencing a debt crisis in recent times. The outbreak of the Covid-19 pandemic and the Ukraine war has seriously impacted the ability of developing countries to repay their debts. It is pretty much evident in Sri Lanka which has announced itself as a defaulter due to its inability to repay the debt for the first time in its 70 years of independence. The Asian Development Bank has identified Sri Lanka as “a tale of two deficits” which indicates Sri Lankan trade and budget deficits are caused by over-reliance on imports and development projects. The due debts are a certain way to plunge a country into an economic crisis which eventually turns into political turmoil, which Sri Lanka has faced and continues to face.
Sri Lanka owes foreign creditors more than $51 billion. There has been a dramatic rise in Sri Lanka’s debt-to-GDP ratio in the last few years, going from 42% to 104% in only two years. It had a debt repayment of $8.6 billion with $78.2 million in interest payments in April this year against a nascent foreign reserve which forced the country to halt all the repayments in May. In Sri Lanka’s total debt of $51 billion, the Asian Development Bank (ADB) and the World Bank make up 13 and 9 percent respectively. China and Japan are the major bilateral lenders to Sri Lanka accounting for around 10 percent of Sri Lanka’s total foreign debt. Borrowing from the international capital market based on international sovereign bonds (ISBs) accounts for almost half of Sri Lanka’s foreign debt which has worsened the scenario.
The economic history of the world says that many countries in the past such as Argentina, Brazil, Greece, the UK, and many more faced acute debt crises. Argentina faced a debt crisis more than six times. Although the international money lenders or donors largely contributed to creating such kind of debt burden and associated economic crises, in most cases they came to bail out albeit with harsh terms and conditions. But in the case of Sri Lanka why they have delayed or even remained oblivious? It is a serious issue for any state that needs to be understood to understand the Sri Lanka crisis.
The lack of collaboration from Sri Lankan donors is readily apparent, which leads to the worsening of the ongoing crisis. India has emerged as Sri Lanka’s top savior during the first four months of this year despite owing the country only 2% of its overall loans. It extended credit worth $376.9 million during that period. So far, India has pledged $1.9 billion to Sri Lanka in the form of loans, currency swaps, credits for energy and necessities, and more. China, on the other hand, which is one of the major bilateral donors to Sri Lanka, extended a total credit of $67.9 million during the first quarter of this year. China has also promised to provide $2.5 billion, of which $1 billion will be in the form of a loan and the other $1.5 billion would be in the form of a buyer’s credit. Discussion is going on about the restructuring of debt to Sri Lanka which will help reduce the burden for Sri Lanka. In stating the reasons behind the lack of concession made toward Sri Lanka, the Chinese counterpart has argued that any concession to Sri Lanka will encourage the Chinese borrowers to seek similar treatment which will not bring any good for China.
Asian Development Bank (ADB) was the second largest donor after India in the first four months of this year. It has credited $359.6 million in total during that time. World Bank, which owns 9% of Sri Lanka’s total debt, credited only $67.3 million at the same time. It also agreed to provide $600 million in financial assistance to Sri Lanka in April, but still no updates on that. Japan, another major bilateral donor of Sri Lanka, has not committed any direct financial assistance to Sri Lanka but through institutions like World Food Program (WFP) and IMF. Japan has agreed to provide $3 million in funding to help Sri Lanka which will be used by WFP and UNICEF. This will barely help Sri Lanka to overcome the financial crisis.
Most importantly, the international capital market which owes around 55% of Sri Lankan’s total debt has been maintaining silence. There is hardly any talk of concession being made from the stakeholders. This non-cooperation from the Sri Lankan top lenders is making the crisis a long one without any possible way out in sight. It is true that some lenders have committed financial assistance to Sri Lanka, but given the magnitude of the crisis, these commitments have proved inadequate. In addition, the majority of unfulfilled commitments are in the form of loans, which would raise Sri Lanka’s debt burden. Furthermore, Sri Lanka’s debt to GDP ratio was rising starting in 2019 and there was a clear concern of a default at the time, but no assistance or guidance was offered until a political and economic crisis broke out in Sri Lanka.
We cannot discount the politics behind the lack of collaboration from Sri Lankan top creditors. Due to its geostrategic location in the Indian Ocean and the Bay of Bengal, Sri Lanka has been a major target of great powers to establish influence there. This crisis has opened a new window of opportunity for countries like India, Japan, and the US to regain their strong position in Sri Lanka against China. So, one cannot fully describe India’s enthusiasm to help Sri Lanka from an altruistic viewpoint in light of that. Moreover, Western countries have been blaming the Sri Lankan crisis on China in the name of the so-called Chinese “debt trap”, a term quite popular in the Western media. A closer look into Sri Lankan debt will tell us that US and European financial institutions, as well as Western allies like Japan and India, control an astounding 81 percent of Sri Lanka’s foreign debt in comparison to 10% owned by China.
BlackRock (US), JPMorgan Chase (US), Prudential (US), Ashmore Group (Britain), HSBC (Britain), Allianz (Germany), and UBS (Switzerland) are the top lenders of Sri Lanka in the forms of ISBs. Again, the US has a great influence on the World Bank and ADB. According to the Center for Strategic and International Studies (CSIS), ADB is a strategic asset of the US against the China-led Asian Infrastructure Investment Bank. So, the non-cooperation from the international financial market which is mostly controlled by the US and its European allies cannot be seen as a mere consequence. Many have argued that the West wants to give a lesson to the world through Sri Lanka with that. On the other hand, China is blaming the West to create debt problems for developing countries in Asia and Africa through its financial liberalization policies and other regulations.
One can zero down on Sri Lanka’s unprecedented pains and tears to the mercantilist and Kabuliwalas (the infamous moneylenders) approach of the international money lenders. Now, Sri Lanka has appealed to the IMF, where the US has the largest voting share of 16.5%, for a bailout package. But the recent discussion has ended without any agreement. It received sixteen loans from the IMF starting in 1965, and each loan imposed harsh terms and conditions on the Sri Lankan economy. But these loans have not helped Sri Lanka. In the meantime, Sri Laka has elected its new President, Ranil Wickramasinghe. It needs to address the root causes of its vulnerabilities quickly with the international money lenders and domestic policies through the right mix of strategies. Sri Lanka also needs to learn how to manage the great power politics delicately. Moreover, major powers need to come forward instead of playing the blame game to solve the crisis. Because it is the general people who are suffering and taking the most heat of the crisis.
[Photo by AntanO, via Wikimedia Commons]
*Muhammad Estiak Hussain is a Research Analyst at the KRF Center for Bangladesh and Global Affairs (CBGA), Dhaka, Bangladesh.
Muhammad Estiak Hussian is a Research Analyst at the KRF Center for Bangladesh and Global Affairs (CBGA).