Sri Lanka’s Economic Triple Whammy: Indiscriminate Debt Over The Years, Covid & The Tourism Crisis

COLOMBO: An Excerpt from ‘The Gist‘, Direct From Colombo, with Nitin A. Gokhale, Founder and Editor-in-Chief StratNews Global and BharatShakti in conversation with Associate Editor Amitabh P. Revi.

For the full discussion: website descriptor: https://www.youtube.com/watch?v=UDPqs9ALPug&t=905s

Editor’s Note: StratNews Global regrets Intermittent audio ambience and lyp sync issues because of the local Sri Lankan network.

Transcript:
NAG: Indeed, India has stepped up its efforts to help Sri Lanka. The relationship has had its ups and downs for various reasons for the past 20 years. In the past couple of years, President Gotabaya Rajapaksa was trying to restore the relationship. But, because of the COVID-19 pandemic, not enough exchanges took place between the leadership. Although, India has stepped up, has given nearly $2.3 billion worth of help through various means. There is a short term or soft loan. There is $500 million in that $ 2.3 billion to buy diesel and petroleum products. There is another $500 million given for buying essential food items or importing them. And there is now a demand from Sri Lanka for one more tranche of say one $1-1.2 billion to tide over the current crisis. But, the crisis is not going to end just like that. What the President told me was his major worry today is that the international sovereign bonds, which this country has given in the financial markets, are up for repayment. Nearly $1.5 billion in the next couple of months. Sovereign bonds are not with financial institutions. They are with private equities, private financial institutions, banks. And, they’re calling in the debt now. That is a major worry. Of course, now Sri Lanka has decided to go to the IMF for debt restructuring and also get a bailout package from the World Bank and the IMF. But, that will still take time- several months-which are going to be very crucial and very painful for Sri Lanka.

APR: President Rajapaksa did mention, as your tweet says, that India is ready to provide more assistance if needed in the near future.

NAG: Oh, yes, India I think will have to step in through various means. Maybe postpone payments or repayments that India has due coming from Sri Lanka. That may happen. India may even send petrol, but India is dependent on petroleum product imports and given what’s happening in the (Russia-Ukraine) war and the price going up, it’s going to be a very difficult situation. Also, bilateral loans don’t work, the President was telling me it has to be an IMF bailout package. He was trying to avoid it, earlier governments have tried to avoid it. Because of earlier decisions, I want to point out Sri Lanka’s governments have been profligate over the years. Even if you take just the last 15-16 years, the public debt of Sri Lanka was nearly 91% of GDP in 2006. From 2010, one year after the war ended in 2009 to about 2014-15, there was an economic boom. GDP grew from 2006 figures of about $34 billion to over $79 billion in those years. So, consequently, the public debt that includes sovereign bonds as well as the foreign exchange payments that had to be done, came down to about 71%. But post 2019, again it goes to about 94% and in 2021 the public debt is 119% of GDP, which no country can sustain. That is because governments have taken loans indiscriminately, without thinking of the consequences and the repayments that will become due over the years. There was already accumulated debt coupled with COVID-19, some wrong decisions in cutting back taxes, like VAT and other taxes, which the President made as soon as he took over in November 2019. All that has now come to bite Sri Lanka severely. That is the worry. That it should not default on the sovereign payments. So the IMF seems to be the only saving grace or maybe only a bailout package will save Sri Lanka from its current crisis.

APR: As the President mentioned, bilateral loans and swaps don’t really work and an IMF bailout is what will be looked at in the near future. What’s the status vis-a-vis China? We read a lot about Sri Lanka continuing to take loans from China to pay off loans from China.

NAG: Yes, in fact, so I was studying that. Surprisingly China and Japan hold about 10% of Sri Lanka’s debt. So China, partly has certain influence over the island nation. It has managed to take some land in important infrastructure projects when the payment was not done. The period of the previous government, from 2015 to 2019, public debt increased, foreign exchange reserves plummeted. Therefore, the current government of President Gotabaya Rajapaksa and his brother, Prime Minister Mahinda Rajapaksa had a very difficult time to recover from what happened there. They were also responsible for it between 2006 and 2014. But, it was added to it by the previous government. Now China, whatever loans they gave, they are asking for it back. But, maybe then China will also bail them out as India has done. But, other sovereign bonds are not easy to repay. That is the main worry for the government and people. Common people don’t understand all this. They only look at what is happening. currently. They are blaming President Rajapaksa for faulty policies of forcing farmers to go in for organic fertilizers rather than chemical fertilizers that also affected the output of the crop. Tourism has almost become non-existent during the COVID-19 pandemic. Double, triple whammy for this country, which depends so much on its natural beauty and tourists who come to enjoy themselves.

APR: A lot to be done to get Sri Lanka’s economy back on track like that train that just passed by you, Nitin.