SANISHA PACKIRISAMY: When sovereign debt turns sour

Sri Lanka’s travails are a template of what could face more vulnerable developing countries. And the path towards fiscal recovery isn’t easyStudents and Sri Lankans protests against President Gotabaya Rajapaksa, in Colombo, Sri Lanka. Picture: REUTERS/DINUKA LIYANAWATTE

However, it was the shock of Covid on Sri Lanka’s tourism earnings and the war in Ukraine that tipped the economy into its worst economic crisis since obtaining independence in 1948. What’s more, the complexity of debt restructuring efforts has increased as the composition of sovereign debt in low-income developing countries is more diffuse. In particular, there has been a major rise in debt dependency on China and on private bondholders.

The rising cost of debt is particularly risky for countries where flawed policy frameworks and impaired fiscal apparatus were apparent even before the pandemic Returning the economy to a more sustainable debt path will entail remedial actions that will likely make life more painful for ordinary Sri Lankans in the short term.

If left unchecked, this could very well trigger the next episode of global financial instability. Pre-emptive action is needed to resolve the approaching debt crisis in these nations.

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