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.
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.
“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 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.
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.