sovereign debt crisis: defaulting in Sri Lanka

Question 1

Why is balance of payments important?

Answer 1

It indicates the ability of a country to repay its debts and thus can determine its ability to borrow money on international markets.

If a country records too big a deficit on the balance of payments then investors may doubt the ability of a country to repay and stop lending to their government.

Question 2

What did the Sri Lankan government do in 2009?

Answer 2

Took out large foreign loans, particularly from China to help fund infrastructure projects, and also in part to help fund tax cuts and boost its domestic popularity.

Question 3

What happened in 2019 that disrupted Sri Lanka’s tourism industry?

Answer 3

There were a series of terrorist attacks in capital city Colombo.

Question 4

How much revenue had Sri Lanka’s tourism industry made in 2019? What happened after the attacks?

Answer 4

$5bn. Dropped to $1.5bn, worsened by the pandemic.

Question 5

What was the most crucial, ill-fated law that the Sri Lankan government passed in 2021?

Answer 5

The ban of fertilisers and encourage organic-farming. A major export market is tea, and the fertiliser ban devastated the income and led to tea exports collapsing while food imports grew.

Question 6

What did the Sri Lankan government do in response to the worsening trade balance?

Answer 6

Doubled down on tax cuts, funded by printing more money. Resulted in inflation catastrophic for the country, rising food + fuel prices and mass protests, overthrowing the president and his administration.

Question 7

What did the interim government of Sri Lanka do in September 2022?

Answer 7

Struck a deal with the IMF for a bailout of $2.9bn, conditional on significant economic reforms being conducted.