Trying to develop its infrastructure to increase its economic potential has plunged Sri Lanka deep into a pit of debt, pushing the country to the brink of bankruptcy and prompting an IMF bailout.
The official estimate of what Sri Lanka currently owes its financiers is $64.9 billion — $8 billion of which is owned by China. The country’s debt-to-GDP currently stands around 75% and 95.4% of all government revenue is currently going towards debt repayment.
This debt situation is clearly not sustainable, but there’s more:
In addition to racking up large amounts of government debt via the usual channels, it’s now becoming evident that the previous government also utilized state-owned enterprises to take out additional loans on its behalf. While the full extent of this extracurricular lending seems unknown, current estimates peg it at a minimum of $9.5 billion — which is all off the books of the finance ministry.
“We still don’t know the exact total debt number,” Sri Lanka’s prime minister admitted to parliament earlier this month.
Much of Sri Lanka’s pile of debt accrued in the process of initiating an entire buffet of large-scale and extremely expensive infrastructure projects under the direction of former president Mahinda Rajapaksa.
Between 2009 and 2014 Sri Lanka’s total government debt tripled and external debt doubled, as the country engaged in a number of costly undertakings — such as attempting to build a new, multi-billion dollar city in the middle of a jungle (which includes the world’s emptiest international airport), constructing one of the most expensive highways ever made, as well as other pricey endeavors, such as spending $42 million just to remove a rock from Colombo Harbor.
But this doesn’t necessarily mean that Sri Lanka’s current administration is doing much better. Under President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe, who came to office at the beginning of 2015, domestic debt grew by 12% and external debt by 25% without starting any new large-scale infrastructure projects.
This fact has not gone unnoticed by former president Mahinda Rajapaksa, who recently issued a series of public taunts, claiming that with the money the current administration has so far borrowed he could have built “two Mattala Airports, one Hambantota Port, one Norochcholai Coal Power Plant, one Colombo-Matara Highway, one Colombo-Katunayake Highway, not one, but two Colombo Port cities and one 500 MW Sampur Coal Power Plant…”
Sri Lanka may be in a debt trap that it can’t get out of. This year alone $4.5 billion is due to foreign lenders and next year $4 billion is owed — bills which the country has not yet figured out a way to pay.
Various interim solutions to the debt crisis have been proposed, such as offering debt-for-equity swaps to countries, such as China, that Sri Lanka owes big and privatizing and outright selling loss-incurring SOEs, which have yet to receive much interest.
The IMF did agree to provide Sri Lanka with a $1.5 billion bailout in the form of a loan in April after the country agreed to a set of criteria to attempt to right the course of its wavering economy. However, as reported by East Asia Forum, Sri Lanka’s Central Bank has stated that it is their intention to secure an additional $5 billion in loans after receiving these funds — and corresponding seal of approval — from the IMF as the debt trap continues getting deeper. (Forbes)