Neighbouring Sri Lanka, which is battling an economic crisis, is halting repayment of its foreign debt, which includes government bonds and government borrowings. The economic condition of the country has become so bad that the country is not in a position to repay its old debt. Sri Lanka’s economic situation started deteriorating when the country entered the Covid lockdown in 2020.
Sri Lankans have been facing shortages of fuel, food and other essential commodities and daily power cuts for the past few months. Most of those items are paid for in hard currency, but Sri Lanka is on the verge of bankruptcy, saddled with dwindling foreign reserves and $25 billion in foreign debt. About $7 billion is owed this year.
Apart from seeking help from the IMF, the government has turned to India and China to help deal with the shortfall. India has helped Sri Lanka to sail through these dwindling times, earlier this week India had send fuel supply to the government of Sri Lanka.
The government of SriLanka intends to proceed with the IMF as soon as possible to formulate a comprehensive plan to restore Sri Lanka’s external public debt to a fully sustainable state and present the country’s creditors.
Clearly, it seems that the IMF is not very keen to actively address the growing economic issue in Sri Lanka by restructuring its debt. According to the Ministry of Finance of Sri Lanka, the IMF has assessed its debt situation as unsustainable.
Sri Lanka has decided to suspend foreign debt payments to avoid hard defaults. When a country makes a hard default on its loans it can lead to forfeiture and enforcement action by the lender.