Sri Lanka has defaulted on a massive debt – over $56 billion, according to the World Bank – leaving many people scrambling without fuel, food, and medications.
It was the South Asian country’s first default since becoming an independent country in 1948. The result? A growing political and humanitarian crisis. Academic experts say that Sri Lanka isn’t alone: Several other countries are in similar and disastrous financial straits.
In the case of Sri Lanka, “clearly this is a humanitarian problem and not just an economic one,” said John Ciorciari, Director of the International Policy Center and Weiser Diplomacy Center at the University of Michigan. Many people are going without food and essential medicines.
After weeks of grounded planes, Direct Relief has multiple shipments in progress to support the country’s medical system, including the insulin needs of people with diabetes in the country. The organization was able to ship 22 cartons of insulin and insulin delivery devices to 11 hospitals and healthcare facilities in Sri Lanka in August. The doses should support the health needs of 212 children and young adults with Type I diabetes in Sri Lanka. Just over 11% of Sri Lankan adults aged 20 to 79 have been diagnosed with Type I diabetes.
A second shipment of insulin has also arrived in the country and is expected to be delivered to 14 health facilities next week. This shipment contains enough insulin and insulin delivery devices to treat 400 children with Type 1 diabetes.
Ciorciari, also associate dean for research and policy engagement and professor of public policy at the Ford School, said that Sri Lanka relies on imports from other countries. He said the country’s default on international loans will hurt its reputation and ability to work with other countries in the future. Sri Lanka’s fiscal reputation will be damaged at a particularly problematic moment: According to Ciorciari, countries are recovering from the coronavirus pandemic and the ongoing Ukraine war, which means there are fewer resources to go around.
These events have already affected Sri Lankans. In 2018, Sri Lanka earned over $5 billion from tourism. That revenue dropped to $1 billion in 2020, according to the World Bank, as travel was suspended during the coronavirus pandemic. Now, six months into the Ukraine war, a global food shortage has hit Sri Lankans as well.
The Michigan professor said Sri Lanka’s situation deserves a robust international response, especially considering that many of the loans came with unrealistic repayment strategies when they were signed. Pressure has been building on China to restructure some of Sri Lanka’s loans and Japan recently asked Western creditors to gather to consolidate loans, according to Reuters.
Now, several other countries are likely to default on debts in the coming months. That’s dangerous for countries that rely on imports to feed, medicate, and fuel the livelihoods of their people.
Lebanon, Russia and Zambia have already defaulted on international debts this year.
Lebanon defaulted on international debts and the country’s currency lost 90 percent of its value. Over half of Lebanon households now live in poverty. The International Monetary Fund deployed hundreds of millions of dollars to support Lebanon and has proposed several policy measures to strengthen its government.
Russia’s default is largely a response to sanctions imposed by western countries after Russia’s President invaded Ukraine and the country is expected to continue to lose access to global investors. Zambia overborrowed as well and the country is restructuring its debt with China and France.
Argentina, Ecuador, Egypt, Tunisia, and Ukraine are on the verge of defaulting on bonds and loans through foreign currency.
“Nonpayment is obviously hugely costly for the country’s reputation,” Ciorciari said.
As the government scrambles to figure out debt payments, Sri Lanka’s 22 million people are bearing the brunt of the lack of funds. Imports have been blocked from entering the country, and fuel shortages have also prevented people from leaving. Medical supplies are harder to find and government-funded support for medications has decreased, leaving many without necessary medications like formerly government-sponsored insulin programs.
Neil DeVotta, professor of politics and international affairs at Wake Forest University, said that the debt default is unsurprising, given that the country has had longstanding budget deficits since becoming independent.
DeVotta, who is an expert on South Asian politics, said he sees an economic and political crisis happening at the same time, given Sri Lanka’s political elites’ misuse of funds and prioritization of lavish infrastructure, which the country can’t afford. He said millions are expected to fall into poverty due to the ongoing debt.
“The rolling economic crisis meant that people have been waiting in line for days for essentials like cooking gas, kerosene, gasoline, sugar, milk powder, and medicines,” DeVotta wrote in an online essay this summer.
DeVotta said that Sri Lanka has prioritized and overspent on social policies that support literacy and healthcare. The lack of foreign currency exchange has inspired protestors who stormed government agencies and homes in Sri Lanka. Given the country’s ongoing debt, the number of recipients within these programs is likely to be reduced and healthcare affordability is likely to diminish.
International organizations like the International Monetary Fund, the Paris Club, USAID, and the World Bank are aware of Sri Lanka’s debt crisis but do not intend to extend further investments. The World Bank said in May that it does not plan to offer new financing but is repurposing resources to help vulnerable households.
Countries like China are also being asked to consider restructuring high-interest loan repayments as they have done for Zambia. However, the country has not confirmed that changes will be made.
Given other countries are likely to default on debt in the coming months, DeVotta said that he hopes countries across the world will agree to take a “haircut” while renegotiating the terms of foreign transactions that would be better for society as a whole.