Sri Lanka’s debt crisis has become the latest point of geopolitical contention. The country experienced extreme economic hardship during the COVID-19 pandemic, leaving it unable to pay billions of dollars worth of debt to private and government creditors. Following an unprecedented defaulting of its debts and a political crisis that saw the president resign and the prime minister’s office raided, Sri Lanka stands on the precipice of an economic and humanitarian catastrophe. With the United States, Russia, India and China all weighing in, the world’s monetary eyes have turned toward the struggling island nation.

A Closer Look at Sri Lanka’s Collapse

Sri Lanka’s debt ballooned over the last few years due to domestic crises and an unfavorable economic situation. Relying primarily on exports to feed an ever-growing deficit, the country’s situation took a turn for the worse when pandemic supply shocks and tourism dried up foreign revenue, causing blackouts along with food and energy shortages. Unsurprisingly, political turmoil quickly followed suit, ending with the ousting of President Rajapaksa and the ascension of Wickremesinghe to office. Now, Sri Lanka has nearly no foreign reserves and a 119% debt-to-GDP ratio.

If the macroeconomic situation seems dire, it pales in comparison to the suffering of Sri Lanka’s poorest citizens. Between 2021 and 2022, poverty rates increased by half to 25.6%, pushing 2.7 million more people into the grips of poverty. Additionally, inflation in Sri Lanka hit a record high of 73.7% in October 2022. With the world’s economy expected to shrink over the next year, Sri Lanka’s predicament threatens to worsen as its crisis deepens.

Sri Lanka’s Creditors

Underlying these pressures are private and public groups using Sri Lanka as a pawn on the international stage. China accounted for close to 10% of Sri Lanka’s debt by April 2021 but refuses to negotiate the amount owed, insisting on “a two-year moratorium” instead. India, China’s competition in the region, offered Sri Lanka an emergency $4.4 billion in credit, attempting to woo the island nation away from its traditional source of funding. The International Monetary Fund (IMF) says it will only consider a relief package if Sri Lanka can come to an agreement with its main creditors.

In addition, private banks have played hardball with Sri Lanka, exacerbating the current crisis. These organizations collectively hold half of Sri Lanka’s debt, lending to the island nation at an exorbitantly high-interest rate. Renowned economists, such as Thomas Piketty, note that many of these companies knew Sri Lanka would be unable to repay its debt but chose to offer it loans regardless. His conclusion is that risky lending must bear the consequences.

Debt Assistance

Although some economists like Piketty champion cancellations of Sri Lanka’s debt, a more moderate solution does seem plausible. The IMF showed more openness to an emergency loan as talks with China and India continued. Provided Sri Lanka passes austerity and anti-corruption measures, the IMF said in September 2022 that it would be willing to give $2.9 billion in funding. Vitally, this aid would allow the country to purchase much-needed medical equipment and food. Private creditors also demonstrated a willingness to restructure Sri Lanka’s debt, pending approval from President Wickremesinghe.

Domestically, Sri Lanka’s president stressed the importance of weathering the economic storm. Urging his fellow countrymen forward, President Wickremesinghe stated that as pay raises for civil servants come into effect “the public would become prosperous, with income sources increasing. The interest rate can be reduced. In another three years, present incomes can be increased by 75%.” Indeed, inflation will likely decrease from 45% in 2022 to 23% in 2023 and only 8% in 2024.

Foreign Aid to Help During Sri Lanka’s Debt Crisis

Amid Sri Lanka’s debt crisis, it is important not to lose sight of those most affected by the country’s economic woes: its people. Given the dire condition of food, fuel and supplies, immediate aid provides the most tangible form of assistance. In June 2022, USAID announced almost $6 million worth of humanitarian aid to Sri Lanka on top of assistance worth close to $12 million a month prior. The funding will “provide cash assistance, short-term jobs, and agriculture supplies such as seeds directly to crisis-affected people to meet their basic needs,” the USAID website says.

Meanwhile, the United Nations raised $79 million to relieve food and medicine shortages in Sri Lanka. Through its Humanitarian Needs and Priorities Plan, the U.N. aims to help about 3.4 million Sri Lankans in need of aid.

With increased aid and pressure from the international community to resolve the crisis, a resolution to the crisis appears, if not imminent, at least plausible. Although this provides scarce comfort to the 6.3 million Sri Lankans that food insecurity has affected as of September 2022, it is an important step in the right direction while humanitarian organizations address the needs of struggling people on the ground.

– Samuel Bowles
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