The major problem facing the cash-starved Sri Lanka in South Asia is how to pay $4.8 billion foreign debt being due during February-October 2022.
Foreign reserves dwarfing so rapidly hint that a sovereign default, amounting to $26 billion, is imminent. The country's foreign currency reserves were just $1.58 billion as of November last year, down from $7.5 billion when Gotabaya Rajapaksa assumed power as president in 2019.
Sri Lanka has been printing money to pay off domestic loans and foreign bonds. The results are record inflation, skyrocketing food prices, and government coffers running dry and the island nation appears to be staring at a "humanitarian crisis".
According to estimates by the World Bank, half a million people in Sri Lanka have fallen below the poverty line since the pandemic started, giving a "huge setback to five years' worth of progress."
The US-based credit rating agency Fitch has downgraded Sri Lanka to a 'CC' rating, which is the lowest prior to a default.
Triggering fears that Sri Lanka could go bankrupt this year, the country's economy contracted by 1.5 percent in the third quarter of 2021, the state-owned Census and Statistics Department said in December.
The government Jan. 5 said the country will not default on its international debt and announced a $ 1.2 billion relief package and Basil Rajapaksa, finance minister, said the country will pay the international sovereign bond of $ 500 million due in a fortnight.
Ajith Nivard Cabraal, Sri Lanka's Central Bank governor, has also said that the nation would be able to pay off its debts "seamlessly".
Sri Lanka's economic crisis started with the pandemic and the tourism sector, which contributes more than 10 percent of its GDP, was hit badly.
The government blames the pandemic for the current crisis as all major revenue earning sectors like exports of garments, tea and spices, and inward worker remittances were severely impacted by the pandemic. But some experts pointed out that the Covid-19 pandemic only exacerbated an older crisis.
The crisis was aggravated in April last year when the government banned the use of chemical fertilizers in farming as it planned a 100 percent organic agriculture sector which was resisted by farmers and the ban was reversed in October.
Inflation soared last year after the Sri Lankan rupee crashed, forcing President Rajapaksa to declare a state of economic emergency on Aug. 30, 2021, to prevent hoarding of essential items and a former army general was given the power to seize food stocks hoarded by traders and retailers. Five months down the line, basic goods are beyond the reach of many people.
Contrary to popular narratives, Sri Lanka's external debt is not due to Chinese loans, but by market borrowings, which amount to nearly half of the country's total foreign debt.
Sri Lanka owes China over $5 billion, which is nearly 10 percent of the country's total foreign debt. It has urged Beijing and another regional powerhouse India to restructure the debt and has other credit lines.
International financial markets, Asian Development Bank, and Japan are the biggest lenders and China is Sri Lanka's fourth.
The government in December said it will try to settle oil debts with Iran by paying the Persian nation with tea and will ship $5 million worth of tea every month to Iran to save "much-needed currency" and to clear a $251m debt.
Sri Lanka has requested India to allot $1.9 billion assistance, besides a $500 million credit line for fuel and a $400 million swap. Similar Sri Lanka requests are pending with China and Bangladesh too.
The government is not keen on seeking a bailout from the International Monetary Fund (IMF) as it would involve a raft of new austerity measures, which can add new burdens on the people.
It is not clear how assistance comes to Sri Lanka's rescue in the coming weeks. However, the country must prepare to meet its daunting foreign debt obligations for 2022, including bond repayments of $500 million in January and $1 billion in July.
Meeting the repayment this year means Sri Lanka might be left with no dollars to import essentials for its 21.8 million inhabitants in the Indo-Pacific commerce and tourist hub with sharp divisions along religious lines and a history of civil war.