According to media reports, Sri Lanka, a country in the Indian Ocean, is facing a serious debt problem and has been unable to repay its debt, with a debt of 6.9 billion yuan to China alone. Sri Lanka is rumored to be trying to pay off its debts in various ways, even considering using its own animals as collateral.
Sri Lanka's external debt problem has become a major challenge for the country's economy. Sri Lanka's total external debt has reached $51 billion, and the amount to be repaid will reach $25 billion by 2026, according to data from the Associated Press last July. This huge external debt burden has greatly hampered Sri Lanka's economic development. According to the World Bank, Sri Lanka's economy is expected to contract by a further 4.2% in 2023. This shows that Sri Lanka's economic situation is extremely grim and there is an urgent need to take effective measures to promote economic recovery and development.
The root cause of Sri Lanka's debt problems lies in its national debt structure. Sri Lanka has long borrowed heavily in international capital markets, but these funds have not been used properly, resulting in a sharp decline in foreign exchange reserves. In addition, the domestic fiscal deficit is a direct source of the debt problem. As a developing country, Sri Lanka needs huge amounts of money for economic construction, but the accumulation of debt has made it impossible for the country to cope with various economic risks and challenges.
In addition, Sri Lanka's debt problems stem from a large exposure to high-interest international sovereign bonds. As Sri Lanka's borrowing continues to expand and its borrowing channels become more diversified, international sovereign bonds have become a common way to borrow. However, the relatively high interest rates of this borrowing method, combined with Sri Lanka's low credit rating, have led to high debt costs. International sovereign bond issuance is usually rated by credit rating agencies, and too low a rating will increase borrowing costs and exacerbate debt pressure.
The Sri Lankan government is in talks with the International Monetary Fund (IMF) to try to find a solution to ease the economic pressures. According to the New York Times, the Sri Lankan government wants to receive $2.9 billion in aid to enhance its economic performance. The IMF usually provides financial assistance in times of global crisis. Since the Sri Lankan government submitted its request for assistance to the IMF, the two sides have begun negotiations to explore how to improve Sri Lanka's economic situation.
So far, Sri Lanka needs to repay 6.9 billion yuan of debt from China. However, according to 2022 data, Sri Lanka's total external debt is about $51 billion, of which Western countries and regions have at least 90% of the claims. This means that the West is Sri Lanka's largest creditor. Although China also has a share of the debt, it is less than US$1 billion, or about 6.9 billion yuan. In contrast, the share of debt in Western countries and regions far exceeds this figure. These figures show the significant impact of Western countries and regions on Sri Lanka's economy.
Given that Sri Lanka's debt problem has attracted global attention, countries are looking for solutions. China expressed its willingness to find a suitable solution through negotiation and consultation. Meanwhile, Japan, France and India announced that they will jointly set up a new debt restructuring platform to coordinate Sri Lanka's debt restructuring with creditor countries. Japan has also called on China to join the platform.
Sri Lanka's debt problems have caused considerable distress to the country's economy and the actions taken by the Government. Therefore, the establishment of this new debt restructuring platform is very necessary. Chinese Foreign Ministry spokesman Wang Wenbin said that China has always supported its financial institutions in actively discussing debt solutions with Sri Lanka and advocated that many countries share responsibilities to alleviate Sri Lanka's debt problem.