The Pathfinder Foundation produced a Report “Pathfinder Beyond the Box; a New Economic Vision for post-Covid Sri Lanka,” which was presented to senior policy makers and made available to the public in May 2020. Today, it is time to reinforce the urgency of addressing the issues raised in that report and consider the efficacy of the recommendations contained therein.
On December 17, 2021, Fitch downgraded Sri Lanka’s rating to “CC”, the lowest rating prior to default. With external reserves at around $1.6 billion and almost $1 billion in debt-service payments coming due in January 2022 (and $7 billion during the coming year), the country faces a very real possibility of a sovereign debt default. If this were to happen, what would be the consequences for the economy, the poor, and society?
Has the time come to consider seriously the merits of restructuring the government’s external debt obligations? The Sri Lankan authorities have indicated that they are in the process of negotiating inflows to meet the country’s immediate foreign exchange requirements. However, there is considerable uncertainty as to whether there would be sufficient inflows to meet the acute dollar illiquidity over the medium-term.
Sri Lanka is facing what is arguably its most challenging external financing crisis. Gross Official Reserves have declined to USD 1.6 bn as at end-November. Repayments over the subsequent 12 months amount to about USD 7 billion. The authorities have responded with import and capital controls as well as a fixed exchange rate based on moral suasion by the CBSL and rationing of foreign exchange by the commercial banks. This has resulted in a scarring of the economy which will inevitably have an adverse impact on growth, employment and incomes. Inflation is rising and is on the verge of reaching double digits and shortages constantly emerge of essential goods and services.