“We have lost the ability to repay foreign debt.” This was the message from Sri Lanka’s newly appointed Central Bank Governor Nandalal Weerasinghe to journalists on Tuesday. The announcement could signal a wave of defaults across the Global South and makes Sri Lanka the newest front in a war of words about Chinese lending to the Global South.
Colombo announced a halt on all repayments on foreign debt, to preserve its foreign currency for food and medicine. The announcement came amid ongoing protests against the government of President Gotabaya Rajapaksa, and warnings that the island state could face mass starvation.
All repayments to foreign bondholders, bilateral lenders, and institutional creditors will be halted until there is progress in debt restructuring, the finance ministry announced. It said the government is in negotiation with creditors and the IMF and warned of a formal default. President Rajapaksa, whose family is widely blamed for mismanaging the country’s finances, has so far refused to resign.
Coverage of the crisis, especially in neighboring India, has emphasized the role of Chinese loans. Times of India characterized the crisis as Sri Lanka being “caught in a strategic debt trap” set by Beijing. China is Colombo’s largest bilateral lender, but it only holds 9.8% of its total debt. Japan’s share is only 0.1% smaller. In contrast, lending data shows that a whopping 47.2% of the country’s total debt is commercial, including to bondholders.
Sri Lanka owes about $12.5 billion in eurobonds, with $78.2 million in payments coming due on April 18 on two bonds, maturing in 2023 and 2028. It also faces several other payments this year, including $1.03 billion on a maturing note by July 25.
This puts Sri Lanka in a similar bind as Zambia, where China has also come in for a lot of criticism both for the size of its loans and their opacity. However, as massive asset managers like BlackRock face increasing pressure to write off some of these loans, they complain that fiduciary law keeps them from doing so without the formal approval of their clients – a near impossibility because these loans are made up of the savings of millions of ordinary people.
However, as the Sri Lankan hospitals cancel operations because they can’t afford anesthetics, and the country faces electricity cuts of up to 13 hours per day, the international coverage of the crisis could kick off another round of Chinese debt trap narratives as more and more defaults creep up across the Global South.
SUGGESTED READING:
- Times of India: How Sri Lanka fell into debt trap, defaulted on foreign payments
- Reuters: Sri Lanka unilaterally suspends external debt payments, says it needs money for essentials by Uditha Jayasinghe and Jorgelina Do Rosario
