In January 2021, Russia and Ukraine accounted for more than a quarter of Sri Lanka’s tourism source markets. Russia was also the second-largest buyer of Sri Lanka’s tea in January. Both countries had increasingly become an essential source of foreign currency for Sri Lanka. However, under frozen tourism and blocked tea exports due to the Russia-Ukraine war compounded by the debt trap from the China’s Belt and Road Initiative, the island nation now may face the risk of default.
Sri Lanka has borrowed significantly from China, partly under China’s Belt and Road Initiative (BRI). Data from the World Bank presented that in 2020 Sri Lanka cumulatively issued long-term bonds as high as 46 billion dollars. According to the country’s Department of External Resources, 35 billion dollars was recorded in foreign debt, while China is Sri Lanka’s largest bilateral creditor, accounting for about 10% of Sri Lanka’s foreign debt.
After a 1.5 billion dollar currency sway with China in December last year, Sri Lanka raised its foreign exchange reserves to 3.1 billion dollars, just enough to repay its debt. Unexpectedly, the foreign exchange continued to be spent. In January this year, its foreign exchange reserves dropped by 25%, having only 2.1 billion dollars left.
According to Public Finance, Sri Lanka’s usable foreign exchange reserves reached 792 million dollars while the 12-month outflows at the end of 2021 stood at 6,904 million dollars, approximately 9 times the January 2022 reserve balance.
Sri Lanka is going on a debt-increasing path, with debt accounting for 109% of GDP in 2021 and being predicted to make up 116.1% of GDP by 2025.
Additionally, the Sri Lanka Ministry of Finance projected that the government must repay annually on average 4.4-billion-dollar foreign debt between 2021 and 2025.
It was thought that the epidemic situation would gradually improve this year, and the tourism industry would recover. In addition to the tea export, Sri Lanka estimates that tourism and tea can earn more than 260 million dollars in foreign exchange this year. Unexpectedly, the war between Russia and Ukraine has hit two major industries.
Based on Sri Lanka Tourism Development Authority (SLTDA) reports, over 26% of all tourists entering Sri Lanka this year came from Russia and Ukraine. Besides, Russia is also the main buyer of tea in the country. This year, Russia jumped to the Number 2 top tea consumer. At present, its tea export to Russia is blocked due to the freezing of tourists from Russia, Ukraine, and other countries, and the government’s finances are even worse.
Bloomberg Economics estimates Sri Lanka will face funding needs of 5.7 billion dollars in 2022, including what it needs to fill the current account deficit. It is a huge concern that Sri Lanka may not pay its debts if it does not restructure its overseas debt or devalue the rupee, which is currently pegged to the dollar.
The governor of the Central Bank of Sri Lanka, Ajith Nivard Cabraal, emphasized trying to refinance rather than restructure the notes. He also hoped that the situation in Russia and Ukraine would not continue to escalate.