Sri Lanka’s government has set aside $500 million for maturing bond repayment, Central Bank Governor Ajith Nivard Cabraal said on Jan. 5, a move that some economists believe is a mistake given the country’s foreign currency shortage to pay for imports.
Cabraal announced on Twitter that $500 million has been allocated for an international sovereign bond maturing on Jan. 18, but some economists opposed the move, urging the government to instead restructure its debt.
Sri Lanka is reported to have to make about $4.5 billion in debt repayments in 2022, starting with a $500 million international sovereign bond repayment on Jan. 18.
Shanta Devarajan, Sri Lanka’s former World Bank chief economist, opined that repaying maturing bonds now will only exacerbate the country’s “uncoordinated default” and will do nothing to alleviate the country’s “unsustainable” debt, Daily FT reported.
“Sri Lanka is facing an acute shortage of foreign exchange—people queue in long lines to buy cooking gas; there is no powdered milk; food prices are rising rapidly; power cuts are becoming frequent,” Devarajan said.
“This $500 million could enable people, especially poor people, to buy and cook food for themselves and their children. Instead, the government is choosing to reimburse bondholders, who are hardly poor.”
The country’s inflation rate hit a record high of 11.1 percent in November 2021, with its food inflation rising to 16.9, according to data released by the Central Bank of Sri Lanka. The increase in prices was triggered by a decline in local currency, which fell by 7.5 percent against the U.S. dollar in 2021.
The government subsequently declared an economic emergency under the public security ordinance and appointed an essential services commissioner to regulate food prices charged by merchants and retailers.
Vish Govindasamy, chairman of the Ceylon Chamber of Commerce, also urged the government to find ways to restructure the country’s debt and allow for the use of foreign exchange inflows to ease citizens’ difficulties in obtaining basic necessities.
Govindasamy said that Sri Lanka could not afford to send out messages to the world about food shortages in the country, given that tourism is the country’s primary source of foreign exchange revenue.
Cabraal defended the move and claimed that not paying debt may cause greater difficulties to the country.
“We need a more comprehensive, longer-term plan to address debt and other issues in the Sri Lankan economy. Not honouring [international sovereign bonds] will get Sri Lanka into a path of pain,” he said during an event on Jan. 12.
India on Jan. 13 said it would extend $900 million to Sri Lanka, offering a $400 million in currency swap and deferring $500 million in settlement to the Asian Clearing Union.
Sri Lankan President Gotabaya Rajapaksa has also asked China to help restructure billions of dollars in debt repayments, and requested that China provide a concessional trade-credit plan for Chinese imports.
Cabraal said that talks with Qatar for a $1 billion credit line are also underway, and that the government may consider a new loan from China, Sri Lanka’s fourth-largest lender.
Over the past decade, China has loaned Sri Lanka more than $5 billion for highways, ports, an airport, and a coal power plant. But critics say that the funds were used for white elephant projects with low returns, which China has denied.
In December 2017, the Sri Lankan government leased the entire Hambantota Port to China for 99 years to convert its owed loans of $1.4 billion into equity, but the move has led to tens of thousands of protesters rallying against the deal.
Reuters contributed to this report.