Why did Sri Lanka default on its debt of 51 billion dollars?

Recent days Sri Lanka has been in crisis and today things have gotten so bad that they have declared default on the national debt. So what happened? Why is this country insolvent? Let's find out with 5 minutes in this video.

Angry people in Sri Lanka tried to attack the presidential palace and were responded by police with water cannons and tear gas, social media sites were banned and curfews were declared across the country. Before that, thousands of people took to the streets to protest in anger as the country fell into a state of fuel and food shortages, it can be said that Sri Lanka's economy is in a serious crisis. More specifically, in February, Sri Lanka's foreign currency reserves were only 2.3 billion USD, compared to January it decreased by 70%, with a small amount of foreign currency Sri Lanka could only import goods to meet the needs of the people within a month.

 

It is worth mentioning that the import demand of this country is extremely large, even basic and essential goods such as sugar, grains, and pharmaceuticals must be imported from abroad.

 

Due to low foreign currency reserves, it became increasingly difficult and scarcer to import these things, leading to a rapid increase in the prices of these basic commodities and a dizzying increase in inflation has reached 25%. In the interview, a teacher in Sri Lanka said that her family used to spend about 30,000 rupees a month or about $900, however, in February, her family had to spend 83,000 rupees, equivalent to about $2490.

 

In addition, Sri Lanka also faces a serious energy shortage because fuel is also imported from other countries, people are only allowed to use electricity for 4 hours in a day. Power cuts were so severe, Sri Lanka's electricity minister had to instruct officials to turn off street lights to save electricity, petrol is similar, there are always long lines of people waiting to buy gasoline.

 

So what got Sri Lanka into such a bad state? Actually, the problem of a country is always extremely complicated with many reasons, but below are the main reasons including:

 

The first is the religious crisis. Sri Lanka is a country with a predominantly service economy, where tourism is the main economic sector but in 2019 some citizens of this country broke their own economy.

 

Specifically, a terrorist group believed to be Muslim organized bomb attacks on churches and hotels on Easter Day that killed 269 people, including 45 foreign tourists. That prompted travelers to immediately cancel flights to Sri Lanka because they felt unsafe.

 

After that event, anti-Muslim riots broke out, houses, vehicles, and property of many Muslims were vandalized. Of course, Muslims also reacted violently, which makes Sri Lanka more unstable, more dangerous and less attractive in the eyes of tourists. The tourism industry is ruined, Sri Lanka loses a huge source of income, that is the first cause.

 

We come to the second cause, which is that Sri Lanka has been black about religions attacking each other, even more black because of the Covid pandemic. While tourists are few, the embargo on flights caused by Covid makes Sri Lanka even less visitors. Without customers, without money, Covid also attacked both the people and the economy of this country. A huge budget continues to be poured into the fight against the epidemic, the economy has stopped working, Sri Lanka fell into crisis, the government had to increase foreign borrowing to spend.

 

The third is the mistake of the President. In 2019, Gotabaya Rajapaksa became president, soon after, he fulfilled his campaign promises.

 

First, he reduced taxes. Logically, reducing taxes will make goods cheaper, make people spend more, stimulate the economy to develop more. But this logic is not always true because Sri Lanka reduced taxes at the time of Covid raging, people locked at home could not go to buy goods no matter how cheap the price. Therefore, tax reduction becomes meaningless, not only that, but it also has the opposite effect, that is, the Government has a large budget deficit from taxes.

 

Next, the President also promised to turn Sri Lanka into an organic industrial country, away from chemical fertilizers and pesticides. Although it benefits the environment and people's health, it should have been done gradually, just for one night, the President ordered a nationwide ban on the import of chemical fertilizers and pesticides. A sudden change made not only the people but also the plants stunned, that year's crop yield was reduced by 30%.

 

Sri Lanka from a self-sufficient country in rice now has to import. In just six months, the Government had to spend 450 million USD to import rice. Tea is similar, it used to bring a lot of foreign currency to Sri Lanka but after the ban it also lost productivity and the tea industry was destroyed.

 

And the fourth cause is China, it is said that China is using debt trap diplomacy. China is a major creditor to Sri Lanka, China has given Sri Lanka a loan to build Hambantota international port at a cost of 1.3 billion USD, but this port has suffered a great loss that makes Sri Lanka unable to pay its debt. To settle the debt, Sri Lanka sold an 80% stake to a Chinese company, in return Sri Lanka received $1.2 billion in foreign currency, which made confidence in the government's management decrease.

 

With the above four reasons, the value of the Sri Lankan rupee has dropped rapidly. In March, 1 dollar for 200 rupees, now the conversion rate has dropped to 1 dollar for 330 rupees. Money falls, imports become more expensive, which causes even more inflation and money depreciation. Economic crisis, all 26 ministers in the Government of Sri Lanka have submitted their resignation.

 

In the end, the Sri Lankan economy was unable to pay its debts and declared default on $51 billion in debt. What happens if a country defaults on its debt? Please review the video of Interesting Knowledge. Thank you for watching the video, goodbye and see you again.