Since 2014 Sri Lanka's foreign debt begun a sharp rise, reaching 42.9\% of the country's GDP in the year 2019. The onset of the COVID-19 pandemic induced global recession accelerated the crisis and by 2021 the foreign debt rose to 101\% of the nation's GDP causing an economic collapse. The vast majority of the foreign debt is owed to China. Between 2005 and 2015, Colombo borrowed billions from China, accumulating a mountain of debt for expensive infrastructure projects. In 2021 Sri Lana 's Government officoially declared the worst economic crisis in the country in 73 years. Local news papers have depicted cartoons of Sri Lanka pleading for cash from neighboring SAARC countries. Indian observers have noted that the Colombo Port Project with China has accelerated the debt crisis. According to Chinese state media, it is the largest project by China in Sri Lanka with a total value of the project at $1.4 billion. Sri Lanka's Energy Minister Udaya Gammanpila acknowledged the crisis could lead to a financial terror. In 2020 a New York-based agency said Sri Lanka's existing funding sources did not appear sufficient to cover its debt servicing needs estimated at just over $4.0 billion in 2021. According to economist BELLWETHER "To solve Sri Lanka’s ‘budgetary problem’ in repaying debt, Treasuries auctions have to succeed. When that is done, the ‘transfer problem’ of foreign exchange will be automatically solved. But this is beyond the ken of Keynesians. Instead with failed Treasury bill auctions filled with printed money under Modern Monetary Theory the country is slipping deeper into imbalances." To resolve the debt crisis BELLWETHER noted that Sri Lanka needs a credible fiscal plan and monetary policy, taxes have to be hiked in order to repay debt, and terest rates and opening of imports will allow taxes to flow back to the Treasury. While it is possible to raise rates and generate dollars to repay foreign debt by curtailing domestic credit, it is not practical to do it on an ongoing basis for many years. If investors see foreign reserves going up after debt repayments confidence may could come back. But it is a painful affair, which may or may not work given the current ideology.
Since 2014 Sri Lanka's foreign debt begun a sharp rise, reaching 42.9\% of the country's GDP in the year 2019. The onset of the COVID-19 pandemic induced global recession accelerated the crisis and by 2021 the foreign debt rose to 101\% of the nation's GDP causing an economic collapse. The vast majority of the foreign debt is owed to China. Between 2005 and 2015, Colombo borrowed billions from China, accumulating a mountain of debt for expensive infrastructure projects. In 2021 Sri Lanka 's Government officially declared the worst economic crisis in the country in 73 years. Local news papers have depicted cartoons of Sri Lanka pleading for cash from neighboring SAARC countries. Indian observers have noted that the Colombo Port Project with China has accelerated the debt crisis. According to Chinese state media, it is the largest project by China in Sri Lanka with a total value of the project at $1.4 billion. Sri Lanka's Energy Minister Udaya Gammanpila acknowledged the crisis could lead to a financial terror. In 2020 a New York-based agency said Sri Lanka's existing funding sources did not appear sufficient to cover its debt servicing needs estimated at just over $4.0 billion in 2021. According to economist BELLWETHER "To solve Sri Lanka’s ‘budgetary problem’ in repaying debt, Treasuries auctions have to succeed. When that is done, the ‘transfer problem’ of foreign exchange will be automatically solved. But this is beyond the ken of Keynesians. Instead with failed Treasury bill auctions filled with printed money under Modern Monetary Theory the country is slipping deeper into imbalances." To resolve the debt crisis BELLWETHER noted that Sri Lanka needs a credible fiscal plan and monetary policy, taxes have to be hiked in order to repay debt, and interest rates and opening of imports will allow taxes to flow back to the Treasury. While it is possible to raise rates and generate dollars to repay foreign debt by curtailing domestic credit, it is not practical to do it on an ongoing basis for many years. If investors see foreign reserves going up after debt repayments confidence may could come back. But it is a painful affair, which may or may not work given the current ideology.
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