In its recent history, Sri Lanka has withstood civil war, the devastating tsunami of 2004 and the terrorist attacks of 2019 which killed 269 people in Colombo, the capital. Now the nation of 21.8 million, just off the southern tip of India, finds itself tested by a deep economic collapse that could lead to a humanitarian crisis and political upheaval.
Reviews | Sri Lanka’s debt crisis calls for US help
The short-term cause of the disaster lies in the coronavirus pandemic, which has dried up Sri Lanka’s tourism revenue stream. The government has compounded the damage by banning fertilizer imports to save foreign currency in 2021; the perverse result was a poor harvest and an increased need for food imports. Burdened by a $51 billion external debt, Sri Lanka is essentially bankrupt and cannot afford to import food or fuel. Citizens have to wait days for rations and street protests break out regularly. President Gotabaya Rajapaksa is negotiating a bailout from the International Monetary Fund – but is also pleading with Russian President Vladimir Putin for emergency fuel deliveries.
The prospect that Mr. Putin could use the pain of Sri Lanka to expand Russian influence over the Indo-Pacific region is one of the reasons – apart from human tragedy – for the United States to pay attention. Another is the prospect of similar desperation in other heavily indebted countries. Rising interest rates, combined with the oil and food shocks resulting from the war in Ukraine, are exacerbating the difficulties of debtor nations. According to a recent IMF report, of the 73 countries that the Group of 20 has declared eligible for a pandemic-related Special Debt Service Suspension Initiative (DSSI) in 2020, 41 are at high risk of debt distress, or y are already. Ethiopia and Zambia have requested some relief under the DSSI and 20 other countries are showing signs of needing it this year, according to the IMF.
The parallels with the debt crisis of the 1970s and 1980s are striking. One of the complicating factors of the current situation compared to past debt crises is that the most indebted countries owe money not only to Western governments and banks, but also to private bondholders and, above all , to China. About 18% of their borrowing comes from Beijing, which, unlike its Democratic counterparts, does not generally offer “soft” credit. Sri Lanka is a good example: China and Japan each hold around 10% of its external debt, but the latter’s money has come at much lower interest rates and longer maturities, according to Nikkei Asia. China also operates separately from the Western-backed Paris Club of official creditors, making transparency over the loans it has provided elusive.
The upshot is that the US should use its power as the IMF’s largest shareholder to help countries restructure their debts, but that will be much harder to do with a multiplicity of private bondholders involved and with China. engaged in the equivalent of international predatory lending. Sri Lanka offers the Biden administration an opportunity to stage a bailout in conjunction with other members of the Quadrilateral Security Dialogue – India, Japan and Australia. This could both alleviate suffering and show all of the Indo-Pacific that it pays to deal with the United States rather than China or Russia.