China News Service, July 13th (Gong Hongyu) Will a sovereign country "collapse" because it can't pay its debts or buy things?

Recently, Sri Lanka, which has been struggling for several months in a state of soaring prices and depleted supplies, officially "bankrupt" with the announcement of Prime Minister Ranil Wickremesinghe.

　　Why do countries go bankrupt?

What exactly does bankruptcy mean?

Data map: Sri Lanka.

Photo courtesy of the interviewee

'A tear in the Indian Ocean' owes tens of billions of dollars

　　Because of its topography, Sri Lanka is called "a tear in the Indian Ocean" and is a bright pearl on the ocean.

And this tear was really "dried" this time, and it went bankrupt due to the depletion of foreign exchange reserves and the inability to pay foreign debts.

　　According to media reports, as early as May 19, Sri Lanka has been unable to repay the interest on the debt of 78 million US dollars due.

At that time, Sri Lanka's foreign debt had exceeded 51 billion US dollars, but its available foreign exchange reserves were less than 50 million US dollars.

　　On July 8, under the pressure of heavy food and fuel costs, Sri Lanka became the first country to stop paying foreign debts this year, and the debt crisis is unprecedentedly serious.

　　Why is Sri Lanka "running out of money"?

A report released by the Asian Development Bank shows that the country has a long-term deficit in foreign trade, with "inadequate revenue and excess consumption", and has borrowed a lot of foreign debt because it cannot afford imports.

　　To make matters worse, after the outbreak of the new crown epidemic, the tourism industry, one of Sri Lanka's pillar industries, suffered heavy losses, and its ability to earn foreign exchange was greatly weakened. The superimposed Russian-Ukrainian conflict made Sri Lanka's cost of importing food and oil soaring, and Sri Lanka's trade deficit intensified. out of hand.

　　On the other hand, the Sri Lankan government has implemented fiscal deficit and tax reduction policies in recent years, resulting in a significant reduction in government revenue.

In addition, with the Fed raising interest rates and the appreciation of the dollar, Sri Lanka's debt pressure has also become more, and finally slipped into the abyss.

　　In addition, it is worth mentioning that, affected by the government's ban on the import of pesticides and herbicides, farmers in Sri Lanka have greatly increased their planting costs but their yields have fallen sharply, which also forced Sri Lanka to buy more food from abroad at high prices.

With foreign exchange reserves being depleted, an unprecedented food crisis is brewing.

Blackouts, gas cuts and starvation... what else does it mean for a country to go bankrupt?

　　"There is no gasoline, can't afford food, have to go hungry, can only use electricity for 10 hours a day." This is the life situation that Sri Lankans are experiencing.

　　A record slump in Sri Lanka’s foreign exchange reserves now means the country’s purchasing power has been wiped out and the dollar, which is used to pay for basic imports including food, medicine and fuel, is bottoming out.

　　Since July 10, Sri Lanka has stopped selling fuel to ordinary people, becoming the first country in the world to "cut fuel" since the 1970s.

　　In addition, according to media reports, in March this year, because the government did not have enough dollars to import paper, the semester exams of Sri Lankan students were postponed indefinitely; subsequently, street lights across the country were also turned off to save electricity and fuel; in June, due to lack of fuel and food , the government announced that for the next three months, civil servants will be home every Friday to farm.

　　On June 22, Prime Minister Ranil Wickremesinghe declared that Sri Lanka's economy had completely collapsed and that the country's situation "may hit rock bottom."

　　Sri Lanka's statistics department released data showing that the country's inflation rate reached a record 39.1% in May, of which the year-on-year inflation rate for food items rose to 57.4%.

"I don't know how long the situation of not having enough to eat will continue." Some Sri Lankans commented on Twitter.

　　When public grievances were boiling and supplies bottomed out, on July 9, thousands of Sri Lankan protesters stormed the presidential palace in anger.

Data map: Sri Lankan people.

Many countries may follow the footsteps of debt defaults

　　In fact, Sri Lanka is not the only developing country plagued by economic and debt problems.

　　In April, World Bank President David Malpass revealed his concerns about the economic conditions of developing countries at a meeting.

He pointed out that in 2022, due to the superposition of factors such as the new crown, the conflict between Russia and Ukraine, and climate issues, the prices of commodities such as food and energy in the international market will soar rapidly, which will bring challenges to economies with a single and fragile economic structure.

　　Food, fuel and financial crises triggered or exacerbated by the conflict in Russia and Ukraine could destabilize poorer countries, leading more than 70 countries to default on their debts, following Sri Lanka's lead, United Nations data showed in May, The Wall Street Journal reported.

　　International Monetary Fund (IMF) Managing Director Kristalina Georgieva (Kristalina Georgieva) recently pointed out that nearly one-third of emerging market countries and nearly two-thirds of low-income countries are in debt distress .

　　In addition, as developed economies such as the United States and Europe have raised interest rates, the debt risks faced by emerging economies are also rising.

Zhang Monan, chief researcher of the US-Europe Institute of the China Center for International Economic Exchanges, pointed out in an interview with Zhongxin Finance that the external debt ratio of emerging economies is usually relatively high. Debt repayment pressure.

(Zhongxin Finance)