Sri Lanka has agreed a deal with the IMF to restructure $42 billion of domestic debts, and is in talks with international creditors including China to restructure another $42 billion of foreign debts. Its own banks are not involved in the IMF deal or the foreign debt negotiations, but the government is so anxious about a run on the banks that it’s declared a five-day holiday to keep them closed and depositors at home. Last year Sri Lanka became the first Asia-Pacific country in more than 20 years to default on its foreign debts, built up thanks to Chinese-financed infrastructure projects it could not afford and emergency borrowing and spending during the pandemic. The default cut off Sri Lanka’s access to international capital markets, leading to acute shortages of food, fuel, power and medicines when the country ran out of foreign currency. That in turn caused months of rioting and the collapse of the government of Gotabaya Rajapaksa, who fled to the Maldives for his own safety. His successor, Ranil Wickremesinghe, could face similar instability if he can’t persuade Sri Lankans to submit to the IMF’s bailout conditions, which include tough debt-to-capital ratios.
