Sri Lanka plunged into an economic crisis and only a year later entered into an agreement with the Export-Import (EXIM) Bank of China to cover more than $4.2 billion of its outstanding debt. This was clarified by what the finance ministry said in a statement recently on October 11.
“The agreed indicative terms will provide the necessary fiscal space for Sri Lanka to implement its ambitious reform agenda,” the finance ministry said in a statement.
Not only China, but India is also part of the Sri Lankan debt negotiation process. However, China remains the country’s largest bilateral creditor. China borrowed over $7 billion of Sri Lanka’s total foreign debt, which actually amounts to $42 billion.
Let’s understand the story bit by bit.
Need for help with foreign debt
In 2022, Sri Lanka announced that it had effectively defaulted on a debt of over $83 billion or more. Half of the debt is said to be owed to foreign creditors. The country was also supposed to turn to the International Monetary Fund in the month of April last year.
The crisis in the country was not caused by one but many factors. One of the reasons was the government of President Gotabaya Rajapaksa, which pushed through the most significant tax cuts in the country’s history, affecting the government’s sources of revenue. The COVID-19 pandemic that shook the whole world was also unkind to Sri Lanka, which negatively affected its tourism industry. The pandemic was, therefore, a strong reason behind the crisis.
What made the situation worse was the war in Ukraine which led to fuel shortages. As inflation skyrocketed, many Sri Lankans came out to protest against the government. All these problematic situations and many more led the president to resign in July.
What are Sri Lanka’s plans to combat the economic crisis?
President Rajapaksa sought help from India and China to face the economic crisis. India has been helpful to Sri Lanka, especially in terms of fuel. Sri Lanka has signed a $500 million credit line with India for the supply of diesel. Not only that, India has also given a credit line of $1 billion to import essentials like medicine and food.
Categories: Trends
Source: HIS Education