The economic crisis raises the white flag to Sri Lanka announcing the default on foreign debt. The country argues that repaying its sovereign debt has become “impossible” as international investors are holding back (though not all with hedge funds ready to bet on the Asian country’s recovery).
The country has stopped payments on his foreign currency debt and accelerates talks with the IMF for a bailout. Sri Lanka’s economy is hampered by political instability which makes it more difficult for the country to obtain financial assistance from the IMF. It is a political, economic, and financial collapse and moreover predictable as the Financial Times writes. The island country, with a population like that of Florida, is besieged by corruption, according to Transparency International. Its economy is in tatters after the pandemic disrupted tourism and transportation. Last week, between blackouts and food shortagesthe government of President Gotabaya Rajapaksa resigned.
Structural reforms are in hiding. Sri Lanka has only completed half of its previous IMF programs and the times we are living in are unwilling to raise taxes to replenish the government’s coffers.
Second, Sri Lanka has multiple foreign creditors. China, with about one fifth of the total, is looming. Sri Lanka has asked Beijing for help in restructuring its debts. Beijing has built and financed large infrastructure projects, including the port of Hambantota, in a strategic position.
There are those who are betting on a rise and new investors, including hedge funds, would already be lined up. As Bloomberg reports, according to Modular Asset Management the nation’s dollar bonds have room to recover and the government can eventually get a bailout from the International Monetary Fund. However, caution remains the watchword for investors today.