Home » Foreign Debt default begin to hit the public economic standards

Foreign Debt default begin to hit the public economic standards

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Over six million people or over 28 percent of Sri Lanka’s population are “food insecure” and this situation is likely to deteriorate as the crisis unfolds in the island nation which is grappling with its worst economic crisis, the World Food Programme has said.

Central Bank Governor Nandalal Weearsinghe announced on April 12 that it would suspend payments on its foreign debt(preemptive debt default), a step that underscores the fresh crisis facing a government that is struggling to contain soaring inflation, large-scale protests and a potentially looming humanitarian disaster on an island of 23 million people economic experts allged.

Although the announcement marks Sri Lanka’s first default since its independence in 1948, the move has been increasingly impacted the credibility of the country among international markets, particularly in recent months

The country’s struggled to import fuel, food and even medicine became more difficult with this announcement of CB Governor without trying to service external debts making use of around over$ 4 billion dollars of foreign inflows into the country at that time , local media exposed.

The present government — led by President Ranil Wickremasinghe astute politician who held the post of PM six times — is seeking a bailout from the International Monetary Fund (IMF) and negoatiations with IMf team to reach staff level agreement on bail out package is now underway.

Sri Lanka’s external debt totals $51 billion, and it has about $7 billion in payments due this year.

Many international economists, including those at the IMF, have urged Sri Lanka to negotiate with its creditors — including the Asian Development Bank, Japan, China and private holders such as BlackRock — to pause payments and prioritize stabilizing the country.

As Sri Lanka’s dollar reserves dried up and inflation began to bite, residents have borne the brunt of a 80 percent rise in food prices and queues at gas stations lasting hours seen again every day.

Shortages and queues are increasing with no end in sight, because no country or overseas supplier now wishes to do business with Sri Lanka without an up- front payment, as the country has officially announced that it is bankrupt.

Based on that announcement, the International Ratings Agencies have also placed Sri Lanka’s sovereign debt rating at a default status, while also down- grading all Sri Lankan banks, further aggravating the situation.

Thereafter, in April 2022, the Forex debt servicing was comparatively less at only USD 244 million, while the Forex debt servicing for May and June was only another USD 789 million.

The repayment and roll-over of these amounts were comfortably manageable with the likely inflows from the 25% export conversions to be mandatorily sold to the Central Bank by the commercial banks and the roll-over of maturing SLDBs being arranged as in the past, in addition to the new cash inflows expected from China and India.

It is not possible to have selective defaults of particular sovereign loans, since many loan agreements with international creditors have “cross-default” clauses which are far-reaching.

When a sovereign forex loan is not repaid, the credibility of the country will be lost, and investors will shun that country.

It will be very difficult for the defaulting country to obtain new forex loans thereafter. The access to International Bond Markets may be lost for at least 5 to 10 years after the default.

The country’s banking system will be placed under a lot of pressure and face very serious difficulties when opening letters of credit and carrying out forex transactions.

Forex loans and investments that were previously forthcoming to the local banks would be halted or postponed. Most forex-funded infrastructure projects will stop.

Foreign Direct Investors will adopt a “wait and see” attitude. Small and medium sized import-based businesses and entrepreneurs will face the risk of collapse.

Sri Lanka’s external debt totals $51 billion, and it has about $7 billion in payments due this year.

Forex loans and investments that were previously forthcoming to the local banks would be halted or postponed following the debt default .

Most forex-funded infrastructure projects has alreadystopped. Foreign Direct Investors will adopt a “wait and see” attitude. Small and medium sized import-based businesses and entrepreneurs will face the risk of collapse

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