Sri Lanka Falls Into Default, Sending Warning Across Emerging World

By Geoffrey Smith

Investing.com --Sri Lanka formally defaulted on its foreign debt on Thursday, as a succession of external shocks and economic mismanagement left it without the money to pay even for fuel imports.

The South Asian island nation is the first country in two years to formally default on its debt and threatens to set a precedent for the rest of the world grappling with an increasingly severe inflation problem.

Severe shocks to food and energy prices are causing economic distress in more and more countries, aggravating already existing problems caused by the pandemic and the world's policy response to it.

Central Bank GovernorNandalal Weerasinghe told a briefing that the country hadn't been able to find the money to pay $78 million in interest on a dollar bond and $105 million in interest on a loan from Chinese state-backed entities within the 30-day grace period allowed under the terms of those debts.

While Sri Lanka's foreign debt, at $12.6 billion, is small in relative terms, the economic crisis unfolding there has similarities with various other parts of the emerging world. Revenue from tourism, its biggest generator of foreign currency, fell by over 80% in the first year of the pandemic, according to World Bank data, under the impact of travel bans.