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As external debt repayment deadlines inches closer, all eyes on Sri Lanka– will it restructure part of its debt?

Relief for Pakistan as it clinches a deal with IMF at the last moment

Will Sri Lanka restructure its albatross-like external debt? After the country’s foreign exchange reserves dipped to $1.6 billion in November, it improved to $3.1 billion in December. But is this amount enough—that is the big question. Though Sri Lanka’s finance minister Basil Rajapaksa said that the cash strapped island nation will not default, clearly this amount is significantly lower than what is required to honour repayment deadlines. According to Fitch Ratings, Sri Lanka’s foreign-currency debt repayments in the first quarter of the current year alone is estimated at about $3 billion.

By the middle of the month, Colombo will have to make an international sovereign bond repayment of $500 million.

Former central bank deputy governor WA Wijewardena warned that Colombo was running a substantial risk of defaulting on its repayments, which would have catastrophic economic consequences, the Guardian added.

Also read: Can broke Sri Lanka repay $500 million loan by mid-Jan deadline?

Sri Lanka based news organisation, the Island said that foreign revenues in the next couple of years are unlikely to be sufficient to service external debt obligations while supporting the essential foreign exchange (Forex) requirements of the economy.

China, India and Japan top the list of Sri Lanka’s bilateral lenders.

“The size and persistence of the external financing gap for the foreseeable future makes debt restructuring an urgent priority. It should be possible to negotiate a package which provides three years of breathing space to rebuild Sri Lanka’s economy to earn and attract sufficient foreign inflows to achieve external debt sustainability and place the economy on a path of sustained growth,” it said.

“We are very worried, at this point we are carefully monitoring the situation. Though the finance minister has said that the country will not default, it will be impossible for Sri Lanka to be able to honour the repayment schedule if you just go by pure data and statistics,” an insider told India Narrative.

The Guardian said that Colombo owes China more than $5bn in debt and last year took an additional $1bn loan from Beijing to help with its acute financial crisis, which is being paid in installments.

The dwindling economic situation in Sri Lanka is gradually pushing the island nation on the brink of bankruptcy as scores of citizens are now looking to relocate to other countries.

Also read: Sri Lanka announces $1 billion relief for people as New Year gift

Meanwhile the Reserve Bank of India (RBI) is looking at a currency swap mechanism to keep bilateral trade and investments going for India. The mechanism could entail a swap of a particular amount of money pegged with the US dollar. The arrangement will allow Indian exporters to continue supplying goods to the island nation as they would get paid in rupee. Indian importers sourcing goods from Colombo, on the other hand, will make the payment in Sri Lankan currency and Indian investors can also use the facility for investing in the island nation.

“A decision for restructuring of external debt must be taken at the earliest,” an analyst said.